Journal
CANADIAN JOURNAL OF ECONOMICS-REVUE CANADIENNE D ECONOMIQUE
Volume 41, Issue 1, Pages 1-21Publisher
BLACKWELL PUBLISHING
DOI: 10.1111/j.1365-2966.2008.00453.x
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Finance theory restricts the time-series behaviour of valuation ratios and links the cross-section of stock prices to the level of the equity premium. This can be used to strengthen the evidence for predictability in stock returns. Steady-state valuation models are useful predictors of stock returns, given the persistence in valuation ratios. A steady-state approach suggests that the world geometric average equity premium fell considerably in the late twentieth century, rose modestly in the early years of the twenty-first century, and was almost 4% at the end of March 2007.
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