MN5612 Group Assignment (Based on groups of your choice)

Due on 11/04/2014
Persons pretending to forecast the future shall be considered disorderly under subdivision 3, section 901 of the criminal code and liable to a fine of $250 and/or six months in prison. -- Section 889, New York State Code of Criminal Procedure

Investors have always been concerned with forecasting the future behaviour of stock market returns (which could put them in danger of being prosecuted under section 889 if done in New York!). Nevertheless, the predictability of stock market returns is one of the most controversial and intensely debated issues in empirical finance. Some authors claim that we can use a variety of financial and macroeconomic variables to predict stock returns while others argue that predicting stock returns is an elusive goal. To name a few, these variables include the dividend-to-price ratio and the dividend yield, the earnings-to-price ratio, the book-to-market ratio, the short term interest rate and the consumption-to-wealth ratio. Provide an overview of the existing academic literature on this topic and give examples of both sides. Your essay should not exceed 3,500 words (this is an upper limit and of course there is no lower bound provided that you are happy with the product of your work).

The following articles are a good starting point for your essay on stock return predictability: Ang, A, Bekaert, G. 2007. Stock return predictability: is it there?, The Review of Financial Studies, 20(3):651-707. Fama, E. 1991. Efficient capital markets: II. The Journal of Finance, 46(5):15751617. Lettau, M., Ludvigson, S. 2001. Consumption, aggregate wealth, and expected stock returns. The Journal of Finance, 56(3):815-849. Rapach, DE., Wohar, ME. 2006. In-sample vs out-of-sample tests of stock return predictability in the context of data mining. Journal of Empirical Finance, 13:231-247.