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Proxying for Expected Returns with Price Earnings Ratios

Author

Listed:
  • Charlotte S. Hansen

    (Zicklin School of Business,Baruch College/CUNY)

  • Bjorn E. Tuypens

    (Oak Hill Platinum Partners, L.L.C.)

Abstract

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.

Suggested Citation

  • Charlotte S. Hansen & Bjorn E. Tuypens, 2004. "Proxying for Expected Returns with Price Earnings Ratios," Finance 0410019, University Library of Munich, Germany.
    • Handle: RePEc:wpa:wuwpfi:0410019
    Note: Type of Document - pdf; pages: 10
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    File URL: https://econwpa.ub.uni-muenchen.de/econ-wp/fin/papers/0410/0410019.pdf
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    References listed on IDEAS

    as
    1. Campbell, J.Y. & Shiller, R.J., 1988. "Stock Prices, Earnings And Expected Dividends," Papers 334, Princeton, Department of Economics - Econometric Research Program.
    2. Charlotte S. Hansen & Bjorn E. Tuypens, 2004. "Long-Run Regressions: Theory and Application to US Asset Markets," Finance 0410018, University Library of Munich, Germany.
    3. Wayne E. Ferson & Sergei Sarkissian & Timothy T. Simin, 2003. "Spurious Regressions in Financial Economics?," Journal of Finance, American Finance Association, vol. 58(4), pages 1393-1413, August.
    4. 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.
    5. repec:bla:jfinan:v:58:y:2003:i:4:p:1393-1414 is not listed on IDEAS
    6. repec:bla:jfinan:v:43:y:1988:i:3:p:661-76 is not listed on IDEAS
    7. 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.
    Full references (including those not matched with items on IDEAS)

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    Cited by:

    1. Charlotte S. Hansen & Bjorn E. Tuypens, 2004. "Long-Run Regressions: Theory and Application to US Asset Markets," Finance 0410018, University Library of Munich, Germany.

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    More about this item

    Keywords

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    JEL classification:

    • C52 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Evaluation, Validation, and Selection
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading

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