Earnings Forecasts and the Predictability of Stock Returns:Evidence from Trading the S&P

25 Pages Posted: 14 Apr 1997

See all articles by Athanasios Orphanides

Athanasios Orphanides

Massachusetts Institute of Technology (MIT) - Sloan School of Management; Asia School of Business

Joel Lander

Government of the United States of America - Division of Research and Statistics

Martha Douvogiannis

affiliation not provided to SSRN

Date Written: January 1997

Abstract

We develop a simple error-correction model, based on a well known theory espoused by Benjamin Graham and David Dodd, and others, which presumes stock returns tend to restore an equilibrium relationship between the forecasted earnings yield on common stocks and the yield on bonds. The estimation uses I/B/E/S analysts forecasts of S&P earnings. To evaluate the model, we use rolling regressions to obtain out-of-sample forecasts of excess returns. Tests of association show the implicit timing signals to be statistically significant. Further, a strategy of investing in cash when the excess return is forecasted to be negative and in the S&P otherwise outperforms the S&P, yielding higher returns with smaller volatility. Using the bootstrap methodology we demonstrate that the findings are statistically significant.

JEL Classification: G11, G14

Suggested Citation

Orphanides, Athanasios and Lander, Joel and Douvogiannis, Martha, Earnings Forecasts and the Predictability of Stock Returns:Evidence from Trading the S&P (January 1997). Available at SSRN: https://ssrn.com/abstract=2075 or http://dx.doi.org/10.2139/ssrn.2075

Athanasios Orphanides (Contact Author)

Massachusetts Institute of Technology (MIT) - Sloan School of Management ( email )

100 Main Street
E62-416
Cambridge, MA 02142
United States

HOME PAGE: http://mitsloan.mit.edu/faculty/detail.php?in_spseqno=54058

Asia School of Business ( email )

Jalan Kuching, Kuala Lumpur, Wilayah Persekutuan K
Kuala Lumpur, MA
Malaysia

Joel Lander

Government of the United States of America - Division of Research and Statistics

20th and C Streets, NW
Washington, DC 20551
United States

Martha Douvogiannis

affiliation not provided to SSRN