Economics at your fingertips  

Earnings Forecasts and the Predictability of Stock Returns: Evidence from Trading the S&P

Joel Lander, Athanasios Orphanides () and Martha Douvogiannis

No 1997-06, Finance and Economics Discussion Series from Board of Governors of the Federal Reserve System (US)

Abstract: We develop a simple error-correction model, based on a well-known theory, espoused by Benjamin Graham and David Dodd and others, which presumes stock returns tend to restore an equilibrium relationship between the forecasted earnings yield on common stocks and the yield on bonds. The estimation uses I/B/E/S analysts forecasts of S&P; earnings. To evaluate the model, we use rolling regressions to obtain out-of-sample forecasts of excess returns. Tests of association show the implicit timing signals to be statistically significant. Further, a strategy of investing in cash, when the excess return forecast is negative, and investing in the S&P;, when the excess return forecast is positive, outperforms the S&P; with higher returns and smaller volatility. Using the bootstrap methodology, we demonstrate that the findings are statistically significant.

Keywords: Asset allocation; earnings yield; analyst earnings forecasts; I/B/E/S; S&P; 500; market timing; regression models (search for similar items in EconPapers)
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (7) Track citations by RSS feed

Downloads: (external link) (application/pdf)

Related works:
Working Paper: Earnings forecasts and the predictability of stock returns: evidence from trading the S&P (1997) Downloads
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:

Ordering information: This working paper can be ordered from
http://www.federalre ... /feds/fedsorder.html

Access Statistics for this paper

More papers in Finance and Economics Discussion Series from Board of Governors of the Federal Reserve System (US) Contact information at EDIRC.
Bibliographic data for series maintained by Ryan Wolfslayer ().

Page updated 2019-07-18
Handle: RePEc:fip:fedgfe:1997-06