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Estimating earnings trend using unobserved components framework

By Arabinda Basistha and Alexander Kurov

Abstract

Regressions for predicting long-term stock returns often use moving averages of earnings as the earnings trend. We show that the earnings trend can be directly estimated using unobserved components models. The estimated trends improve the fit of predictive regressions.Valuation ratios Unobserved components model

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