Proxying for Expected Returns with Price Earnings Ratios

Charlotte Hansen and Bjorn E. Tuypens
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Bjorn E. Tuypens: Oak Hill Platinum Partners, L.L.C.

Finance from University Library of Munich, Germany

Abstract: Long-run regression models using the trailing earnings over price ratio to predict future returns suggested by Campbell and Shiller (1988, 2001) work quite well. However, in this note we show that this variable might result in a downward biased proxy for expected future returns. Instead we suggest using a moving average of the log of 1 plus the earnings price ratio when forecasting long-run returns. The empirical results for the S&P 500 show the superiority of our approach to existing ones.

Keywords: Earnings yield; Stock Return; Forecasting (search for similar items in EconPapers)
JEL-codes: C52 G12 G14 (search for similar items in EconPapers)
Pages: 10 pages
Date: 2004-10-28
New Economics Papers: this item is included in nep-fin
Note: Type of Document - pdf; pages: 10
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Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:wpa:wuwpfi:0410019

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