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Prediction of Stock Returns: A New Way to Look at It

Published online by Cambridge University Press:  17 April 2015

Jens Perch Nielsen  and
Stefan Sperlich
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Abstract

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While the traditional R 2 value is useful to evaluate the quality of a fit, it does not work when it comes to evaluating the predictive power of estimated financial models in finite samples. In this paper we introduce a validated value useful for prediction. Based on data from the Danish stock market, using this measure we find that the dividend-price ratio has predictive power. The best horizon for prediction seems to be four years. On a one year horizon, we find that while inflation and interest rate do not add to the predictive power of the dividend-price ratio then last years excess stock return does.

Keywords

PredictionStock returnsDividend price ratioCross Validation
Type
Workshop
Information
ASTIN Bulletin: The Journal of the IAA , Volume 33 , Issue 2 , November 2003 , pp. 399 - 417
Copyright
Copyright © ASTIN Bulletin 2003

Footnotes

1

Codanhus, 60 Gammel Kongevej, DK-1790 Copenhagen V, Denmark. Email: npj@codan.dk.

2

Universidad Carlos III de Madrid, Email: stefan@est-econ.uc3m.es.

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