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Primary Article

Return Predictability and the P/E Ratio

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Donna Dudney, Benjamas Jirasakuldech and Thomas Zorn
The Journal of Investing Fall 2008, 17 (3) 75-82; DOI: https://doi.org/10.3905/joi.2008.710921
Donna Dudney
An assistant dean and assistant professor of finance, Department of Finance at University of Nebraska-Lincoln College of Business in Lincoln, NE.
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  • For correspondence: ddudney1@unl.edu
Benjamas Jirasakuldech
An associate professor of finance at Slippery Rock University of Pennsylvania School of Business in Slippery Rock, PA.
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  • For correspondence: bjirasak@yahoo.com
Thomas Zorn
George B. Cook/Ameritas College professor of finance, Department of Finance at University of Nebraska- Lincoln College of Business, Lincoln, NE.
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  • For correspondence: tzorn1@unl.edu
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Abstract

The P/E ratio has been used by practitioners and economists as an indicator of market valuations. Shiller [2000] warned that P/E ratios were dangerously high relative to their historical averages. This ratio, however, should in an efficient market vary with factors such as risk, time preferences, inflation, and market expectations. The authors use the residuals from a regression that controls for the effect of these factors on the E/P ratio to provide information about the behavior of the market. They find that the residuals from the model provide a reliable signal of future market behavior.

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Return Predictability and the P/E Ratio
Donna Dudney, Benjamas Jirasakuldech, Thomas Zorn
The Journal of Investing Aug 2008, 17 (3) 75-82; DOI: 10.3905/joi.2008.710921

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Return Predictability and the P/E Ratio
Donna Dudney, Benjamas Jirasakuldech, Thomas Zorn
The Journal of Investing Aug 2008, 17 (3) 75-82; DOI: 10.3905/joi.2008.710921
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