The Good News and the Bad News about Long-run Stock Market Returns
Wright, Stephen M.
Cambridge Working Papers in Economics
Faculty of Economics
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Robertson, D., & Wright, S. M. (2004). The Good News and the Bad News about Long-run Stock Market Returns. https://doi.org/10.17863/CAM.5034
If stock prices followed a random walk, uncertainty about future stock prices would be so great that the observed bias towards equities in long-term investment portfolios would be surprising. The good news is that if, as a growing body of research suggests, there is even a weak tendency for stationary valuation indicators to predict future stock prices, long-run returns can become markedly more predictable. This is illustrated in a cointegrating VAR, with Tobin?s q as one of the cointegrating relations. The bad news is a corollary of the good news: q and most other indicators point to massive at the end of 1997, and hence the prospect of weak stock prices well into the next century.
Classification-JEL: C32, C52, E44, G10, G14, Stock prices, Random walk, Cointegration, Vector autoregressions, Tobin's q, Efficiency
This record's DOI: https://doi.org/10.17863/CAM.5034
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