Working Paper: NBER ID: w8221
Authors: John Y. Campbell; Robert J. Shiller
Abstract: The use of price earnings ratios and dividend-price ratios as forecasting variables for the stock market is examined using aggregate annual US data 1871 to 2000 and aggregate quarterly data for twelve countries since 1970. Various simple efficient-markets models of financial markets imply that these ratios should be useful in forecasting future dividend growth, future earnings growth, or future productivity growth. We conclude that, overall, the ratios do poorly in forecasting any of these. Rather, the ratios appear to be useful primarily in forecasting future stock price changes, contrary to the simple efficient-markets models. This paper is an update of our earlier paper (1998), to take account of the remarkable behavior of the stock market in the closing years of the twentieth century.
Keywords: stock market; valuation ratios; dividend-price ratio; price-earnings ratio; mean reversion
JEL Codes: G12; G15
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| dividend-price ratio (G35) | future stock price decline (G17) |
| dividend-price ratio < 34 (G35) | future stock price decline (G17) |
| dividend-price ratio (G35) | future dividend growth (G35) |
| current dividend-price ratio (G35) | future stock price changes (G17) |