New Financial Ratios Revolutionize Equity Premium Forecasting for Investors
The researchers found a new way to predict stock market returns by looking at the relationship between stock prices and dividends. By using a Generalized Price-Dividend Ratio (GPDR), they were able to better forecast the equity premium of the S&P 500 over different time periods. This new approach outperformed traditional methods using historical market returns. Similar improvements were also seen when using Generalized Financial Ratios based on corporate earnings and book value.