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A Comprehensive Look at the Empirical Performance of Equity Premium Prediction

  • Amit Goyal
  • Ivo Welch

Economists have suggested a whole range of variables that predict the equity premium: dividend price ratios, dividend yields, earnings-price ratios, dividend payout ratios, corporate or net issuing ratios, book-market ratios, beta premia, interest rates (in various guises), and consumption-based macroeconomic ratios (cay). Our paper comprehensively reexamines the performance of these variables, both in-sample and out-of-sample, as of 2005. We find that [a] over the last 30 years, the prediction models have failed both in-sample and out-of-sample; [b] the models are unstable, in that their out-of-sample predictions have performed unexpectedly poorly; [c] the models would not have helped an investor with access only to information available at the time to time the market.

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Paper provided by Yale School of Management in its series Yale School of Management Working Papers with number amz2412.

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Date of creation: 01 Apr 2004
Date of revision: 01 Jan 2006
Handle: RePEc:ysm:somwrk:amz2412
Contact details of provider: Web page: http://icf.som.yale.edu/

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