Forum Archive Index - June 2002

["trader 100" <trader_100@hotmail.com>]

Hi Peter,

I have just read an interesting paper on a related topic.

In a paper which considers investor psychology (more specifically the 
irrationality of investors), Campbell and Shiller (2001) argue that 
"dividend-price and price-smoothed-earnings ratios have a special 
significance when compared to other statistics that might be used to 
forecast stock prices because there is such a long time series of data on 
these ratios (in the US) and because they relate stock prices to careful 
evaluations of the fundamental value of corporations.  The ratios have 
further strength because they weren’t just discovered yesterday ex post.  
Rather, they are ex ante forecasting relations that have been continually 
discussed over the last century." It is noted that these ratios are (or were 
in 2001) well outside their historical ranges which poses a challenge the 
traditional view that stock prices always reflect rational expectations of 
future cash flows.

The reference for the paper is:

Campbell, J.Y. & Shiller, R.J. (2001). Valuation ratios and the long-run 
stock market outlook: An update. Working Paper, Cowles Foundation Discussion 
Paper NO. 1295., Yale University, Connecticut.

I am happy to send you a copy of the paper if you would like one and am 
interested in the references you refer to.  Would you mind supplying them 
please.

Regards,

T100.


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