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54
Predictive regressions
 Journal of Financial Economics
, 1999
"... When a rate of return is regressed on a lagged stochastic regressor, such as a dividend yield, the regression disturbance is correlated with the regressor's innovation. The OLS estimator's "nitesample properties, derived here, can depart substantially from the standard regression setting. Bayesian ..."
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Cited by 257 (16 self)
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When a rate of return is regressed on a lagged stochastic regressor, such as a dividend yield, the regression disturbance is correlated with the regressor's innovation. The OLS estimator's "nitesample properties, derived here, can depart substantially from the standard regression setting. Bayesian posterior distributions for the regression parameters are obtained under speci"cations that di!er with respect to (i) prior beliefs about the autocorrelation of the regressor and (ii) whether the initial observation of the regressor is speci"ed as "xed or stochastic. The posteriors di!er across such speci"cations, and asset allocations in the presence of estimation risk exhibit sensitivity to those
The equity share in new issues and aggregate stock returns
 JOURNAL OF FINANCE
, 2000
"... The share of equity issues in total new equity and debt issues is a strong predictor of U.S. stock market returns between 1928 and 1997. In particular, firms issue relatively more equity than debt just before periods of low market returns. The equity share in new issues has stable predictive power i ..."
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Cited by 152 (25 self)
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The share of equity issues in total new equity and debt issues is a strong predictor of U.S. stock market returns between 1928 and 1997. In particular, firms issue relatively more equity than debt just before periods of low market returns. The equity share in new issues has stable predictive power in both halves of the sample period and after controlling for other known predictors. We do not find support for efficient market explanations of the results. Instead, the fact that the equity share sometimes predicts significantly negative market returns suggests inefficiency and that firms time the market component of their returns when issuing securities.
A Comprehensive Look at the Empirical Performance of Equity Premium Prediction,” working paper
, 2004
"... Given the historically high equity premium, is it now a good time to invest in the stock market? Economists have suggested a whole range of variables that investors could or should use to predict: dividend price ratios, dividend yields, earningsprice ratios, dividend payout ratios, net issuing rati ..."
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Cited by 125 (4 self)
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Given the historically high equity premium, is it now a good time to invest in the stock market? Economists have suggested a whole range of variables that investors could or should use to predict: dividend price ratios, dividend yields, earningsprice ratios, dividend payout ratios, net issuing ratios, bookmarket ratios, interest rates (in various guises), and consumptionbased macroeconomic ratios (cay). The typical paper reports that the variable predicted well in an insample regression, implying forecasting ability. Our paper explores the outofsample performance of these variables, and finds that not a single one would have helped a realworld investor outpredicting the thenprevailing historical equity premium mean. Most would have outright hurt. Therefore, we find that, for all practical purposes, the equity premium has not been predictable, and any belief about whether the stock market is now too high or too low has to be based on theoretical prior, not on the empirically variables we have explored.
Capital markets research in accounting
, 2001
"... I review empirical research on the relation between capital markets and financial statements.The principal sources of demand for capital markets research in accounting are fundamental analysis and valuation, tests of market efficiency, and the role of accounting numbers in contracts and the politica ..."
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Cited by 78 (3 self)
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I review empirical research on the relation between capital markets and financial statements.The principal sources of demand for capital markets research in accounting are fundamental analysis and valuation, tests of market efficiency, and the role of accounting numbers in contracts and the political process.The capital markets research topics of current interest to researchers include tests of market efficiency with respect to accounting information, fundamental analysis, and value relevance of financial reporting.Evidence from research on these topics is likely to be helpful in capital market investment decisions, accounting standard setting, and corporate financial
The Dog That Did Not Bark: A Defense of Return Predictability
, 2006
"... If returns are not predictable, dividend growth must be predictable, to generate the observed variation in divided yields. I find that the absence of dividend growth predictability gives stronger evidence than does the presence of return predictability. Longhorizon return forecasts give the same st ..."
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Cited by 73 (6 self)
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If returns are not predictable, dividend growth must be predictable, to generate the observed variation in divided yields. I find that the absence of dividend growth predictability gives stronger evidence than does the presence of return predictability. Longhorizon return forecasts give the same strong evidence. These tests exploit the negative correlation of return forecasts and dividendyield autocorrelation across samples, together with sensible upper bounds on dividendyield autocorrelation, to deliver more powerful statistics. I reconcile my findings with the literature that finds poor power in longhorizon return forecasts, and with the literature that notes the poor outofsample R² of returnforecasting regressions.
Predicting Excess Stock Returns Out of Sample: Can Anything Beat the Historical Average?
, 2004
"... Goyal and Welch (2006) argue that the historical average excess stock return forecasts future excess stock returns better than regressions of excess returns on predictor variables. In this paper we show that many predictive regressions beat the historical average return, once weak restrictions are i ..."
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Cited by 57 (2 self)
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Goyal and Welch (2006) argue that the historical average excess stock return forecasts future excess stock returns better than regressions of excess returns on predictor variables. In this paper we show that many predictive regressions beat the historical average return, once weak restrictions are imposed on the signs of coefficients and return forecasts. The outofsample explanatory power is small, but nonetheless is economically meaningful for meanvariance investors. Even better results can be obtained by imposing the restrictions of steadystate valuation models, thereby removing the need to estimate the average from a short sample of volatile stock returns. Towards the end of the last century, academic finance economists came to take seriously the view that aggregate stock returns are predictable. During the 1980’s a number of papers studied valuation ratios, such as the dividendprice ratio, earningsprice ratio, or smoothed earningsprice ratio. Valueoriented investors in the tradition of Graham and Dodd (1934) had always asserted that high valuation ratios are an indication of an undervalued stock market and should predict high subsequent returns, but these ideas did not carry much weight in the academic literature until authors such as Rozeff (1984), Fama and French (1988), and Campbell and Shiller (1988a,b) found that valuation ratios are positively correlated with subsequent returns and that the implied predictability of returns is substantial at longer horizons. Around the same time, several papers pointed out that yields on short and longterm Treasury and corporate bonds are correlated with subsequent stock returns [Fama and Schwert
Trading Activity and Expected Stock Returns
 Journal of Financial Economics
, 2001
"... Trading Activity and Expected Stock Returns Given the evidence that the level of liquidity aects asset returns, a reasonable hypothesis is that the second moment of liquidity should be positively related to asset returns, provided agents care about the risk associated with uctuations in liquidity. ..."
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Cited by 51 (8 self)
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Trading Activity and Expected Stock Returns Given the evidence that the level of liquidity aects asset returns, a reasonable hypothesis is that the second moment of liquidity should be positively related to asset returns, provided agents care about the risk associated with uctuations in liquidity. Motivated by this observation, we analyze the relation between expected equity returns and the level as well as the volatility of trading activity (a proxy for liquidity) . We document a result contrary to our initial hypothesis, namely, a negative and surprisingly strong crosssectional relationship between stock returns and the variability of dollar trading volume and share turnover, after controlling for size, bookto market, momentum, and the level of dollar volume or share turnover. This eect survives a number of robustness checks and is statistically and economically signi# cant. Our analysis demonstrates the importance of trading activityrelated variables in the crosssection of ex...
Equilibrium Cross Section of Returns
"... We construct a dynamic general equilibrium production economy to explicitly link expected stock returns to firm characteristics such as firm size and the booktomarket ratio. Stock returns in the model are completely characterized by a conditional capital asset pricing model (CAPM). Size and bookt ..."
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Cited by 50 (11 self)
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We construct a dynamic general equilibrium production economy to explicitly link expected stock returns to firm characteristics such as firm size and the booktomarket ratio. Stock returns in the model are completely characterized by a conditional capital asset pricing model (CAPM). Size and booktomarket are correlated with the true conditional market beta and therefore appear to predict stock returns. The crosssectional relations between firm characteristics and returns can subsist even after one controls for typical empirical estimates of beta. These findings suggest that the empirical success of size and booktomarket can be consistent with a singlefactor conditional CAPM model. We gratefully acknowledge the helpful comments of Andy Abel, Jonathan Berk, Michael
Predictive Regressions: A ReducedBias Estimation Method, working paper
, 2003
"... We propose a direct and convenient reducedbias estimator of predictive regression coefficients, assuming that the regressors are Gaussian firstorder autoregressive with errors that are correlated with the error series of the dependent variable. For the singleregressor model, Stambaugh (1999) show ..."
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Cited by 46 (0 self)
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We propose a direct and convenient reducedbias estimator of predictive regression coefficients, assuming that the regressors are Gaussian firstorder autoregressive with errors that are correlated with the error series of the dependent variable. For the singleregressor model, Stambaugh (1999) shows that the ordinary least squares estimator of the predictive regression coefficient is biased in small samples. Our estimation method employs an augmented regression which uses a proxy for the errors in the autoregressive model. We also develop a heuristic estimator of the standard error of the estimated predictive coefficient which performs well in simulations. We analyze the case of multiple predictors that are firstorder autoregressive and derive bias expressions for both the ordinary least squares and our reducedbias estimated coefficients. The effectiveness of our estimation method is demonstrated by simulations.
The timeseries relations among expected return, risk, and booktomarket
 Journal of Financial Economics
, 1999
"... This paper examines the timeseries relations among expected return, risk, and booktomarket (B/M) at the portfolio level. I "nd that B/M predicts economically and statistically signi"cant timevariation in expected stock returns. Further, B/M is strongly associated with changes in risk, as measured ..."
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Cited by 34 (0 self)
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This paper examines the timeseries relations among expected return, risk, and booktomarket (B/M) at the portfolio level. I "nd that B/M predicts economically and statistically signi"cant timevariation in expected stock returns. Further, B/M is strongly associated with changes in risk, as measured by the Fama and French (1993) (Journal of Financial Economics, 33, 3}56) threefactor model. After controlling for risk, B/M provides no incremental information about expected returns. The evidence suggests that the threefactor model explains timevarying expected returns better than a characteristicsbased