@techreport{NBERw10406,
title = "New Forecasts of the Equity Premium",
author = "Christopher Polk and Samuel Thompson and Tuomo Vuolteenaho",
institution = "National Bureau of Economic Research",
type = "Working Paper",
series = "Working Paper Series",
number = "10406",
year = "2004",
month = "April",
doi = {10.3386/w10406},
URL = "http://www.nber.org/papers/w10406",
abstract = {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.},
}