Where is the Market Going? Uncertain Facts and Novel Theories

John H. Cochrane

NBER Working Paper No. 6207 (Also Reprint No. r2179)
Issued in February 1998
NBER Program(s):Asset Pricing Program, Economic Fluctuations and Growth Program

Will the stock market provide high returns in the future as it has in the past? The average US stock return in the postwar period has been about 8% above treasury bill rates. But that average is poorly measured: The standard confidence interval extends from 3% to 13%. Furthermore, expected returns are low at times such as the present of high prices. Therefore, the statistical evidence suggests a period of low average returns, followed by a slow reversion to a poorly measured long term average. I turn to a detailed survey of economic theory, to see if models that summarize a vast amount of other information shed light on stock returns. Standard models predict nothing like the historical equity premium. After a decade of effort, a range of drastic modifications to the standard model can account for the historical equity premium. It remains to be seen whether the drastic modifications and a high equity premium, or the standard model and a low equity premium, will triumph in the end. Therefore, economic theory gives one reason to fear that average excess returns will not return to 8% after the period of low returns signaled by today's high prices. I conclude with a warning that low average returns does not imply one should change one's portfolio. Someone has to hold the market portfolio; one should only deviate from that norm if one is different from everyone else.

download in pdf format
   (4437 K)

email paper

A non-technical summary of this paper is available in the December 1997 NBER Digest.  You can sign up to receive the NBER Digest by email.

Machine-readable bibliographic record - MARC, RIS, BibTeX

Document Object Identifier (DOI): 10.3386/w6207

Published: Economic Perspectives XXI: 6 (November/December 1997) Federal Reserve Bankof Chicago. citation courtesy of

Users who downloaded this paper also downloaded* these:
Cochrane and Hansen w4088 Asset Pricing Explorations for Macroeconomics
Cochrane w7169 New Facts in Finance
Campbell and Shiller w8221 Valuation Ratios and the Long-Run Stock Market Outlook: An Update
Shin and Stulz w7808 Firm Value, Risk, and Growth Opportunities
Campbell w6485 Asset Prices, Consumption, and the Business Cycle
NBER Videos

National Bureau of Economic Research, 1050 Massachusetts Ave., Cambridge, MA 02138; 617-868-3900; email:

Contact Us