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The Good News and the Bad News about Long-run Stock Market Returns


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Working Paper

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Authors

Robertson, Donald 
Wright, Stephen M. 

Abstract

If stock prices followed a random walk, uncertainty about future stock prices would be so great that the observed bias towards equities in long-term investment portfolios would be surprising. The good news is that if, as a growing body of research suggests, there is even a weak tendency for stationary valuation indicators to predict future stock prices, long-run returns can become markedly more predictable. This is illustrated in a cointegrating VAR, with Tobin?s q as one of the cointegrating relations. The bad news is a corollary of the good news: q and most other indicators point to massive at the end of 1997, and hence the prospect of weak stock prices well into the next century.

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Faculty of Economics

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