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New Forecasts of the Equity Premium / Christopher Polk, Samuel Thompson, Tuomo Vuolteenaho.
- Format:
- Book
- Author/Creator:
- Polk, Christopher.
- Series:
- Working Paper Series (National Bureau of Economic Research) no. w10406.
- NBER working paper series no. w10406
- Language:
- English
- Physical Description:
- 1 online resource: illustrations (black and white);
- Place of Publication:
- Cambridge, Mass. National Bureau of Economic Research 2004.
- Summary:
- 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.
- Notes:
- Print version record
- April 2004.
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