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PREDICTING RETURNS WITH FINANCIAL RATIOS

Author(s)
Lewellen, Jonathan
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Abstract
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 – 2000, as well as in various subperiods. Book-to-market and the earnings-price ratio predict returns during the shorter 1963 – 2000 sample. The evidence remains strong despite the unusual price run-up in recent years
Date issued
2003-01-27
URI
http://hdl.handle.net/1721.1/1805
Series/Report no.
MIT Sloan School of Management Working Paper;4374-02
Keywords
Predictive Regressions, Expected Returns, Small-sample Bias

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