Proxying for Expected Returns with Price Earnings Ratios
Long-run regression models using the trailing earnings over price ratio to predict future returns suggested by Campbell and Shiller (1988, 2001) work quite well. However, in this note we show that this variable might result in a downward biased proxy for expected future returns. Instead we suggest using a moving average of the log of 1 plus the earnings price ratio when forecasting long-run returns. The empirical results for the S&P 500 show the superiority of our approach to existing ones.
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- John Y. Campbell & Robert J. Shiller, 2001.
"Valuation Ratios and the Long-Run Stock Market Outlook: An Update,"
NBER Working Papers
8221, National Bureau of Economic Research, Inc.
- John Y. Campbell & Robert J. Shiller, 2001. "Valuation Ratios and the Long-run Stock Market Outlook: An Update," Cowles Foundation Discussion Papers 1295, Cowles Foundation for Research in Economics, Yale University.
- Charlotte S. Hansen & Bjorn E. Tuypens, 2004. "Long-Run Regressions: Theory and Application to US Asset Markets," Finance 0410018, EconWPA.
- Wayne E. Ferson & Sergei Sarkissian & Timothy T. Simin, 2003.
"Spurious Regressions in Financial Economics?,"
Journal of Finance,
American Finance Association, vol. 58(4), pages 1393-1414, 08.
- Fair, Ray C & Shiller, Robert J, 1990. "Comparing Information in Forecasts from Econometric Models," American Economic Review, American Economic Association, vol. 80(3), pages 375-389, June.
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