New forecasts of the equity premium
By: Christopher Polk, Samuel Thompson, Tuomo Vuolteenaho.
Contributors: Thompson, Samuel B.; Vuolteenaho, Tuomo.; National Bureau of Economic Research.
Series: NBER working paper series ;; working paper 10406; Working paper series (National Bureau of Economic Research : Online) ;; working paper no. 10406.
Publisher: National Bureau of Economic Research
Published: 2004
Place of publication: Cambridge, MA
Language: eng
Format: Electronic resource
Subjects: Stocks -- Prices -- Econometric models.
Description: "If investors are myopic mean-variance optimizers, a stock's expected return is linearly related to its beta in the cross section.  The slope of the relation is the cross-sectional price of risk, which should equal the expected equity premium.  We use this simple observation to forecast the equity-premium time series with the cross-sectional price of risk.  We also introduce novel statistical methods for testing stock-return predictability based on endogenous variables whose shocks are potentially correlated with return shocks.  Our empirical tests show that the cross-sectional price of risk (1) is strongly correlated with the market's yield measures and (2) predicts equity-premium realizations especially in the first half of our 1927-2002 sample"--National Bureau of Economic Research web site.
Notes: Includes bibliographical references.
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Mode of access: World Wide Web.