NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

New Forecasts of the Equity Premium

Christopher Polk, Samuel Thompson, Tuomo Vuolteenaho

NBER Working Paper No. 10406
Issued in April 2004
NBER Program(s):   AP

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.

download in pdf format
   (595 K)

email paper

Machine-readable bibliographic record - MARC, RIS, BibTeX

Document Object Identifier (DOI): 10.3386/w10406

Published: Polk, Christopher, Samuel Thompson and Tuojmo Vuolteenaho. "Cross-Sectional Forecasts Of The Equity Premium," Journal of Financial Economics, 2006, v81(1,Jul), 101-147.

Users who downloaded this paper also downloaded* these:
Campbell and Vuolteenaho w9509 Bad Beta, Good Beta
Campbell and Vuolteenaho w10263 Inflation Illusion and Stock Prices
Campbell and Thompson w11468 Predicting the Equity Premium Out of Sample: Can Anything Beat the Historical Average?
Campbell, Polk, and Vuolteenaho w11389 Growth or Glamour? Fundamentals and Systematic Risk in Stock Returns
Schwert w9277 Anomalies and Market Efficiency
 
Publications
Activities
Meetings
NBER Videos
Themes
Data
People
About

National Bureau of Economic Research, 1050 Massachusetts Ave., Cambridge, MA 02138; 617-868-3900; email: info@nber.org

Contact Us