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Stock Prices, Earnings, and Expected Dividends

John Y. Campbell and Robert J. Shiller
The Journal of Finance
Vol. 43, No. 3, Papers and Proceedings of the Forty-Seventh Annual Meeting of the American Finance Association, Chicago, Illinois, December 28-30, 1987 (Jul., 1988), pp. 661-676
Published by: Wiley for the American Finance Association
DOI: 10.2307/2328190
Stable URL: http://www.jstor.org/stable/2328190
Page Count: 16
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Stock Prices, Earnings, and Expected Dividends
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Abstract

Long historical averages of real earnings help forecast present values of future real dividends. With aggregate U.S. stock market data (1871-1986), a vector-autoregressive forecast of the present value of future dividends is, for each year, roughly a weighted average of moving-average earnings and current real price, with between two thirds and three fourths of the weight on the earnings measure. We develop the implications of this for the present-value model of stock prices and for recent results that long-horizon stock returns are highly forecastable.

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