Prediction of Stock Returns: A New Way to Look at It

Jens Perch Nielsen and Stefan Sperlich ()

ASTIN Bulletin, 2003, vol. 33, issue 2, 399-417

Abstract: While the traditional R 2 value is useful to evaluate the quality of a fit, it does not work when it comes to evaluating the predictive power of estimated financial models in finite samples. In this paper we introduce a validated value useful for prediction. Based on data from the Danish stock market, using this measure we find that the dividend-price ratio has predictive power. The best horizon for prediction seems to be four years. On a one year horizon, we find that while inflation and interest rate do not add to the predictive power of the dividend-price ratio then last years excess stock return does.

Date: 2003
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