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What is the return to investing in the stock market? Can we predict future stock market returns? How have equities performed over the last two centuries? The authors in this volume are among the leading researchers in the study of these questions. This book draws upon their research on the stock market over the past two dozen years. It contains their major research articles on the equity risk premium and new contributions on measuring, forecasting, and timing stock market returns, together with new interpretive essays that explore critical issues and new research on the topic of stock market investing.
This book is aimed at all readers interested in understanding the empirical basis for the equity risk premium. Through the analysis and interpretation of two scholars whose research contributions have been key factors in the modern debate over stock market perfomance, this volume engages the reader in many of the key issues of importance to investors. How large is the premium? Is history a reliable guide to predict future equity returns? Does the equity and cash flows of the market? Are global equity markets different from those in the United States? Do emerging markets offer higher or lower equity risk premia? The authors use the historical performance of the world's stock markets to address these issues.
Contributors
. Introduction: Opening Remarks and Motivation
The Lesons of History
Major Concepts and Roadmap Through the Book
I. The Lessons of History
1: History and the Equity Risk Premium
3: A New Historical Database for the NYSE 1815 to 1925: Performance and Predictability
4: The United States Market Wealth Portfolio
5: World Wealth: U.S. and Foreign Market Values and Returns
II. Demand, Supply, and Building Block Forecasting Methods
6: How to Forecast Long Run Asset Returns
7: The Demand for Capital Market Returns: A New Equilibrium Theory
8: The Supply of Capital Market Returns
9: Building the Future from the Past
10: Long Run Stock Returns: Participating in the Real Economy
III. Simulating and Forecasting
11: Stocks, Bonds, Bills, and Inflation: Simulations of the Future (1976-2000)
12: Predictions of the Past and Forecasts for the Future: 1976-2025
13: Short Horizon Inputs and Long Horizon Portfolio Choice
IV. Survivorship and Selection Bias
14: Survival
15: Survivorship Bias in Performance Studies
16: Global Stock Markets in the Twentieth Century
17: Re-emerging Markets
V. Predicting Variations
18: The Dow Theory: William Peter Hamilton's Track Record Reconsidered
19: Patterns in Three Centuries of Stock Market Prices
20: Bootstrapping Tests of Long-Term Stock Market Efficiency
21: Testing the Predictive Power of Dividend Yields
22: A Longer Look at Dividend Yields
23: Does Asset Allocation Policy Explain 40%, 90%, or 100% of Performance?
Robert Ibbotson is an expert on capital market returns, cost of capital, and international investing. A member of the Yale School of Management faculty since 1986, he joined Yale from the University of Chicago, where he served as the director of the Center for Research in Security Prices (CRSP). He is Chairman and Founder of Ibbotson Associates in Chicago, New York, and Tokyo, which provides asset allocation advice, consulting, software, data, and financial publishing for financial institutions and investment advisors. He is also a Partner in Zebra Capital Management, LLC, which manages hedge funds. Professor Ibbotson is the author of numerous books and articles, including the annual Stocks, Bonds, Bills, and Inflation Yearbook.
Will Goetzmann is the Edwin J. Beinecke Professor of Finance and Management Studies at the Yale School of Management and a Research Associate of the National Bureau of Economic Research. He currently serves as the Director of the International Center for Finance at Yale, an interdisciplinary research organization focused on sponsoring and diseminating academic research in finance. He has taught at the Yale School of Management since 1994 and previously taught at Columbia Business School. He holds a B.A., an M.B.A., and a Ph.D. from Yale. An expert on a diverse range of investments, Will Goetzmann's research topics include the behavior of individual investors, global investing, financial market history, hedge funds, mutual funds, real estate, and art as an investment.
"Understanding the stock market is really about understanding the premium that investors demand for holding stocks over less risky assets. Not surprisingly, then, the 'equity premium puzzle' i.e., the seemingly inexplicably high historical excess returns on the stock market, has become a focus of extensive research and debate. To quote Goetzmann and Ibbotson, 'history matters,' and with the deceptively simple act of putting it together, they have shown us just how much it does and how much we can learn from the past. They have also staked their position firmly in the camp of those who believe that with careful statistical analysis of the historical record, and, in particular, with a clear understanding of the role of survivorship bias, the puzzle can be explained. Whatever prior views they may hold, both the professional and the interested amateur will learn much from this work."--Stephen A. Ross, Franco Modigliani Professor of Finance and Economics, MIT
"William Goetzmann and Roger Ibbotson have produced a searching and comprehensive analysis of how history reveals the forces that shape risk and return in the stock market. But HURRAH! their work is also eminently readable. All investors, economic historians, and financial academics should read this book--and hurry up about it."--Peter L. Bernstein, Publisher of Economics and Portfolio Strategy and Consulting Editor of The Journal of Portfolio Management
