Article2006

Stock Return Predictability: Is it There?

1,295 citations0/0 files storedReview of Financial Studies

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Financial Markets and Investment Strategies Corporate Finance and Governance Financial Analysis and Corporate Governance

Abstract

We examine the predictive power of the dividend yields for forecasting excess returns, cash flows, and interest rates. Dividend yields predict excess returns only at short horizons together with the short rate and do not have any long-horizon predictive power. At short horizons, the short rate strongly negatively predicts returns. These results are robust in international data and are not due to lack of power. A present value model that matches the data shows that discount rate and short rate movements play a large role in explaining the variation in dividend yields. Finally, we find that earnings yields significantly predict future cash flows. (JEL C12, C51, C52, E49, F30, G12)

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References

1988Testing for a Unit Root in Time Series Regression 1992Testing the null hypothesis of stationarity against the alternative of a unit root 1999The Science of Monetary Policy: A New Keynesian Perspective 2000Risks for the Long Run: A Potential Resolution of Asset Pricing Puzzles 1988The Dividend-Price Ratio and Expectations of Future Dividends and Discount Factors 1988Dividend yields and expected stock returns 1977Asset returns and inflation 1985Stock Returns and the Term Structure

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