TY  - JOUR
AU  - Shanken,Jay
AU  - Tamayo,Ane
TI  - Risk, Mispricing, and Asset Allocation: Conditioning on Dividend Yield
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 8666
PY  - 2001
Y2  - December 2001
UR  - http://www.nber.org/papers/w8666
L1  - http://www.nber.org/papers/w8666.pdf
N1  - Author contact info:
Jay A. Shanken
Goizueta Business School
Emory University
1300 Clifton Road
Atlanta, GA 30322
Tel: 404/727-4772
Fax: 404/727-5238
E-Mail: jay_shanken@bus.emory.edu

Ane Tamayo
Regent s Park
London NW1 4SA
E-Mail: atamayo@london.edu
AB  - In the asset pricing literature, time-variation in market expected excess return captured by financial ratios like dividend yield is typically viewed as a reflection of either changing risk, related to the business cycle, or irrational mispricing. Extending the work on asset allocation and dividend yield by Kandel and Stambaugh (1996) to accommodate variation in risk as well as expected return, we develop Bayesian methods to examine the interaction between the data and an investor's initial beliefs about the sources of return predictability. Although results vary with the subperiod examined, different views on the relative importance of these factors can have important implications for asset allocation between a stock index and a riskless asset. In general, however, the simple risk/return model of Merton (1980) explains very little of the yield-related return predictability observed.
ER  -