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RFS Advance Access originally published online on March 17, 2007
Review of Financial Studies 2008 21(4):1455-1508; doi:10.1093/rfs/hhm014
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© The Author 2007. Published by Oxford University Press on behalf of the Society for Financial Studies. All rights reserved. For permissions, please e-mail: journals.permissions@oxfordjournals.org.

A Comprehensive Look at The Empirical Performance of Equity Premium Prediction

Ivo Welch
Brown University Department of Economics NBER

Amit Goyal
Emory University Goizueta Business School

Address correspondence to Amit Goyal, http://www.goizueta.emory.edu/agoyal E-mail: mailto: http://welch.econ.brown.edu E-mail: mailto:ivo_welch{at}brown.edu, or e-mail: amit_goyal{at}bus.emory.edu

JEL: G12, G14


  Abstract

Our article comprehensively reexamines the performance of variables that have been suggested by the academic literature to be good predictors of the equity premium. We find that by and large, these models have predicted poorly both in-sample (IS) and out-of-sample (OOS) for 30 years now; these models seem unstable, as diagnosed by their out-of-sample predictions and other statistics; and these models would not have helped an investor with access only to available information to profitably time the market.

Thanks to Malcolm Baker, Ray Ball, John Campbell, John Cochrane, Francis Diebold, Ravi Jagannathan, Owen Lamont, Sydney Ludvigson, Rajnish Mehra, Michael Roberts, Jay Shanken, Samuel Thompson, Jeff Wurgler, and Yihong Xia for comments, and Todd Clark for providing us with some critical McCracken values. We especially appreciate John Campbell and Sam Thompson for challenging our earlier drafts, and iterating mutually over working papers with opposite perspectives.


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