Stock market valuation and Treasury yield determination are consistent with the Fisher effect (1896) as generalized by Darby (1975) and Feldstein (1976). The U.S. stock market (S&P 500) is priced to yield ex-ante a real after-tax return directly related to real long-term GDP/capita growth (the...

We show that the long-term total market and average investor's compounded stock returns are determined by GDP growth and are much less than believed because of the infeasible assumption that dividends can be fully reinvested. The long-term stock return closely approximates the return on...

We examine the empirical validity of the Fed Model and the Graham and Dodd model for five countries and over a time period spanning three decades by applying the Enders and Granger (1998) and Enders and Siklos (2001) threshold unit-root and cointegration tests. Our results support the hypothesis...

Modigliani and Cohn (1979) put forth a behavioral finance model that predicted mispricing of stocks in the presence of changing inflation. The co-movement of the stock market E/P ratio with the nominal bond yield observed since the mid-1960s (when U.S. inflation started rising) is consistent...

This paper extends the intertemporal capital asset pricing model (ICAPM) to integrate the heterogeneous trading behavior of three groups of investors; rational utility maximizers, positive feedback, or momentum, traders, and fundamental traders. Using several contemporary fundamental factors to...

The efficient market hypothesis describes an efficient market as one in which investors cannot consistently predict stock returns because prices instantly reflect all the information flowing into the market. However, return predictability has been documented in many markets. This study tests the...

The efficient market hypothesis describes an efficient market as one in which investors cannot consistently predict stock returns because prices instantly reflect all the information flowing into the market. However, return predictability has been documented in many markets. This study tests the...

Long-run regression models using the trailing earnings over price ratio to predict future returns suggested by Campbell and Shiller (1988, 2001) work quite well. However, in this note we show that this variable might result in a downward biased proxy for expected future returns. Instead we...

This short paper shows that a New Keynesian model with limited asset market participation can generate a high risk-premium on unlevered equity relative to short-term risk-free bonds and high variability of equity returns driven by monetary policy shocks with zero persistence.