文档介绍：New Forecasts of the Equity Premium
Christopher Polk, Samuel Thompson, and Tuomo Vuolteenaho1
First draft: June 10, 2003
This draft: July 8, 2003
Preliminary and plete
Do not quote, comments solicited
1 Polk is from the Kellogg School of Managment, Northwestern University, Evanston IL
60208; Thompson from the Department of Economics, Harvard University, Cambridge MA
02138; and Vuolteenaho from the Department of Economics, Harvard University, Cambridgge
MA 02138 and the NBER. Email: c-******@, ******@,
t_******@. We would like to thank John Campbell, Kent Daniel, Matti Kelo-
harju, and Jeremy Stein for ments. We are grateful to Ken French and Robert Shiller
for providing us with some of the data used in this study. All errors and omissions remain our
responsibility.
Abstract
If investors are myopic mean-variance optimizers, a stock’s expected return is
linearly related to its beta in the cross section. The slope of the relation is the cross-
sectional price of risk, which should equal the expected equity premium. We use this
simple observation to forecast the equity-premium time series with the cross-sectional
price of risk. We also introduce novel statistical methods for testing stock-return
predictability based on endogenous variables whose shocks are potentially correlated
with return shocks. Our empirical tests show that the cross-sectional price of risk
(1) is strongly correlated with the market’s yield measures and (2) predicts equity-
premium realizations especially in the first half of our 1927-2002 sample.
JEL c l a s s i fication: C12, G12, G14
1 Introduction
The Capital Asset Pricing Model (CAPM) predicts that risky stocks should have
lower prices and higher expected returns than less risky stocks (Sharpe, 1964, Lintner,
1965, Black, 1972). The CAPM further specifies the beta (the regression coefficient
of a stock’s return on the market portfolio’s return) as the relevant m