TY  - JOUR
AU  - Ferreira,Miguel A.
AU  - Santa-Clara,Pedro
TI  - Forecasting Stock Market Returns: The Sum of the Parts is More than the Whole
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 14571
PY  - 2008
Y2  - December 2008
UR  - http://www.nber.org/papers/w14571
L1  - http://www.nber.org/papers/w14571.pdf
N1  - Author contact info:
Miguel A.. Ferreira
Rua Marques de Fronteira, 20
1099-038 Lisboa
Portugal
E-Mail: miguel.ferreira@fe.unl.pt

Pedro Santa-Clara
Faculdade de Economia
Universidade Nova de Lisboa
Rua Marques de Fronteira, 20
1099-038 LISBOA
PORTUGAL
Tel: +351-91-493-4313
E-Mail: psc@fe.unl.pt
AB  - We propose forecasting separately the three components of stock market returns: dividend yield, earnings growth, and price-earnings ratio growth. We obtain out-of-sample R-square coefficients (relative to the historical mean) of nearly 1.6% with monthly data and 16.7% with yearly data using the most common predictors suggested in the literature. This compares with typically negative R-squares obtained in a similar experiment by Goyal and Welch (2008). An investor who timed the market with our approach would have had a certainty equivalent gain of as much as 2.3% per year and a Sharpe ratio 77% higher relative to the historical mean. We conclude that there is substantial predictability in equity returns and that it would have been possible to time the market in real time.
ER  -