02355cam a22002417 4500001000600000003000500006005001700011008004100028100002200069245011300091260006600204490004100270500001900311520141000330530006101740538007201801538003601873700002301909710004201932830007601974856003702050856002602087w2511NBER20140823105413.0140823s1988 mau||||fs|||| 000 0 eng d1 aCampbell, John Y.10aStock Prices, Earnings and Expected Dividendsh[electronic resource] /cJohn Y. Campbell, Robert J. Shiller. aCambridge, Mass.bNational Bureau of Economic Researchc1988.1 aNBER working paper seriesvno. w2511 aFebruary 1988.3 aThis paper presents estimates indicating that, for aggregate U.S. stock market data 1871-1986, a long historical average of real earnings is a good predictor of the present value of future real dividends. This is true even when the information contained in stock prices is taken into account. We estimate that for each year the optimal forecast of the present value of future real dividends is roughly a weighted average of moving average earnings and current real price, with between 2/3 and 3/4 of the weight on the earnings measure. This means that simple present value models of stock prices can be strongly rejected. We use a vector autoregressive approach which enables us to compute the implications of this for the behavior of stock prices and returns. We estimate that log dividend-price ratios are more variable than, and virtually uncorrelated with, their theoretical counterparts given the present value models. Annual returns on stocks are quite highly correlated with their theoretical counterparts, but are two to four times as variable. Our approach also reveals the connection between recent papers showing forecastability of long-horizon returns on corporate stocks, and earlier literature claiming that stock prices are too volatile to be accounted for in terms of simple present value models. We show that excess volatility directly implies the forecastability of long-horizon returns. aHardcopy version available to institutional subscribers. aSystem requirements: Adobe [Acrobat] Reader required for PDF files. aMode of access: World Wide Web.1 aShiller, Robert J.2 aNational Bureau of Economic Research. 0aWorking Paper Series (National Bureau of Economic Research)vno. w2511.4 uhttp://www.nber.org/papers/w2511 uurn:doi:10.3386/w2511