TY - JOUR
AU - Polk,Christopher
AU - Thompson,Samuel
AU - Vuolteenaho,Tuomo
TI - New Forecasts of the Equity Premium
JF - National Bureau of Economic Research Working Paper Series
VL - No. 10406
PY - 2004
Y2 - April 2004
DO - 10.3386/w10406
UR - http://www.nber.org/papers/w10406
L1 - http://www.nber.org/papers/w10406.pdf
N1 - Author contact info:
Christopher Polk
Department of Finance
London School of Economics
Houghton St.
London WC2A 2AE
UK
Tel: +44 (0)20 7849 4917
Fax: +44 (0)20 7852 3580
E-Mail: c.polk@lse.ac.uk
Samuel Thompson
Arrowstreet Capital, L.P.
E-Mail: sambthompson@gmail.com
Tuomo Vuolteenaho
Arrowstreet Capital
200 Clarendon Street #30
Boston, MA 02116-5021
Tel: 617/496-6284
Fax: 617/495-8570
E-Mail: tvuolteenaho@arrowstreetcapital.com
AB - 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.
ER -