Generalized financial ratios to predict the equity premium
Andres Algaba () and
Economic Modelling, 2017, vol. 66, issue C, 244-257
Empirical evidence for the price-dividend ratio to be a predictor of the equity premium is weak. We argue that changes in the economic conditions and market composition lead to a time-varying relationship between prices, dividends and the equity premium. Exploiting the information in the rolling window log-log regression of stock prices on dividends, we obtain the Generalized Price-Dividend Ratio (GPDR), that compares the price per share with a time-varying transformation of the dividend per share. The GPDR leads to economic and statistical gains when forecasting the equity premium of the S&P 500 at the 1, 3, 6 and 12 month horizon, as compared to using the classical price-dividend ratio or the prevailing historical average excess market return. Similar improvements are obtained for Generalized Financial Ratios based on the corporate earnings and book value.
Keywords: Equity premium; ERP; Forecast combination; Price-dividend ratio; Financial ratios; Time-varying parameters (search for similar items in EconPapers)
JEL-codes: C10 G11 (search for similar items in EconPapers)
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (3) Track citations by RSS feed
Downloads: (external link)
Full text for ScienceDirect subscribers only
This item may be available elsewhere in EconPapers: Search for items with the same title.
Export reference: BibTeX
RIS (EndNote, ProCite, RefMan)
Persistent link: https://EconPapers.repec.org/RePEc:eee:ecmode:v:66:y:2017:i:c:p:244-257
Access Statistics for this article
Economic Modelling is currently edited by S. Hall and P. Pauly
More articles in Economic Modelling from Elsevier
Bibliographic data for series maintained by Catherine Liu ().