Stock Prices, Earnings, and Expected Dividends

Authors

  • JOHN Y. CAMPBELL,

  • ROBERT J. SHILLER

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    • Princeton University and Yale University, respectively. An earlier version of this paper was presented at a joint session of the American Economic Association and the American Finance Association in Chicago on December 28, 1987. This research was supported by the National Science Foundation.


ABSTRACT

Long historical averages of real earnings help forecast present values of future real dividends. With aggregate U.S. stock market data (1871–1986), a vector-autoregressive forecast of the present value of future dividends is, for each year, roughly a weighted average of moving-average earnings and current real price, with between two thirds and three fourths of the weight on the earnings measure. We develop the implications of this for the present-value model of stock prices and for recent results that long-horizon stock returns are highly forecastable.

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