Predicting Returns with Financial Ratios

By J. Lewellen. 2004

1,063 citations recorded by the source corpus.

This article provides a new test of the predictive ability of aggregate financial ratios. Predictive regressions are subject to small-sample biases, but the correction in previous studies can substantially understate forecasting power. Dividend yield predicts aggregate market returns from 1946 Â€O 2000, as well as in various subperiods. Book-to-market and the earnings-price ratio predict returns during the shorter 1963 Â€O 2000 sample. The evidence remains strong despite the unusual price run-up in recent years

Subfields: Economics and Econometrics, Finance

View Paper: https://www.semanticscholar.org/paper/91732479afbbc2a617d1966615248716d33dbc66

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Citations in the corpus

Instability of Return Prediction Models (2006, background): “predicting returns include Goetzmann and Jorion (1993), Hodrick (1992), Nelson and Kim (1993), Lamont (1998), Stambaugh (1999), Lewellen (2004) , and Campbell and Yogo (2004).”
Testing for Predictability in Conditionally Heteroskedastic Stock Returns (2015, methodology): “In addition, from the work of Lewellen (2004) we learn that EP is a weak predictor of returns.”
Predictive Regressions: A Reduced-Bias Estimation Method (2004, methodology): “Applying (18) and using the simulation means of φ̂ and of the entries of the matrix Φ̂ (at the bottom of the table), we calculate that the bias for β̂1 and β̂2 should be 1.”
Growth-Rate and Uncertainty Shocks in Consumption: Cross-Country Evidence (2012, neutral): “In a recent survey, Ludvigson (2013) conjectures that a reasonably calibrated long-run risks model cannot fit the evidence of return predictability in the data.”
Reconciling the Return Predictability Evidence In-Sample Forecasts, Out-of-Sample Forecasts, and Parameter Instability (2006, background): “This paper is also related to the recent literature on inference in forecasting regressions with persistent regressors (see e.g., Amihud and Hurwich (2004), Ang and Bekaert (2006), Campbell and Yogo (2002), Lewellen (2004), Torous, Volkanov, and Yan (2004), and Eliasz (2005)).”
Multifactor models and their consistency with the ICAPM (2012, neutral): “25 An incomplete list includes Nelson and Kim (1993), Stambaugh (1999), Kilian (1999), Valkanov (2003), Lewellen (2004), Torous, Valkanov, and Yan (2004), Campbell and Yogo (2006), Ang and Bekaert (2007), and Boudoukh, Richardson, and Whitelaw (2008).”
Assessing the safe haven property of the gold market during COVID-19 pandemic (2021, methodology): “The presence of the persistence effect is a necessary condition for the consideration of the bias-adjusted estimator of Lewellen (2004) and Westerlund and Narayan (2012, 2015) used in this study.”
THE INTERTEMPORAL RELATION BETWEEN EXPECTED RETURNS AND RISK (2008, background): “Stambaugh (1999), Amihud and Hurvich (2004), and Lewellen (2004) point out that a small sample bias exists in time-series predictive regressions when the regression disturbances are correlated with the regressors’ innovations.”
Uncertainty Due to Infectious Diseases and Energy Market Volatility (2020, methodology): “Note that the original specifica- tion of (1) is given as ; however, to resolve any concern with the endogeneity bias resulting from the correlation between and as well as any potential persistence effect, we follow the approach of Lewellen (2004) and Westerlund and Narayan (2012, 2015).”
Liquidity Premia and Transaction Costs (2007, background): “Campbell (1991) and Lewellen (2004) find that expected returns on equities also change over time.”
Predictive Regressions: A Present-Value Approach (2010, neutral): “The null hypothesis for this test is: H0 : σM = ρM = 0, 13See for example Stambaugh (1999), Lewellen (2004), and Lettau and Van Nieuwerburgh (2006).”
Cross-sectional forecasts of the equity premium (2006, methodology): “ Lewellen (2004) provides a good example of a clever test that improves power by making strong”