What is the Chance that the Equity Premium Varies over Time? Evidence from Predictive Regressions∗

We examine the evidence on excess stock return predictability in a Bayesian setting in which the investor faces uncertainty about both the existence and strength of predictability. When we apply our methods to the dividend-price ratio, we find that even investors who are quite skeptical about the existence of predictability sharply modify their views in favor of predictability when confronted by the historical time series of returns and predictor variables. Correctly taking into account the stochastic properties of the regressor has a dramatic impact on inference, particularly over the 2000-2005 period.