The Log-Linear Return Approximation, Bubbles, and Predictability

Tom Engsted, Thomas Pedersen () and Carsten Tanggaard

Journal of Financial and Quantitative Analysis, 2012, vol. 47, issue 3, 643-665

Abstract: We study in detail the log-linear return approximation introduced by Campbell and Shiller (1988a). First, we derive an upper bound for the mean approximation error, given stationarity of the log dividend-price ratio. Next, we simulate various rational bubbles that have explosive conditional expectation, and we investigate the magnitude of the approximation error in those cases. We find that, surprisingly, the Campbell-Shiller approximation is very accurate even in the presence of large explosive bubbles. Only in very large samples do we find evidence that bubbles generate large approximation errors. Finally, we show that a bubble model in which expected returns are constant can explain the predictability of stock returns from the dividend-price ratio that many previous studies have documented.

Date: 2012
References: Add references at CitEc
Citations: View citations in EconPapers (42)

Downloads: (external link)
https://www.cambridge.org/core/product/identifier/ ... type/journal_article link to article abstract page (text/html)

Related works:
Working Paper: The log-linear return approximation, bubbles, and predictability (2010)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:cup:jfinqa:v:47:y:2012:i:03:p:643-665_00

Access Statistics for this article

More articles in Journal of Financial and Quantitative Analysis from Cambridge University Press Cambridge University Press, UPH, Shaftesbury Road, Cambridge CB2 8BS UK.
Bibliographic data for series maintained by Kirk Stebbing ().