The Dog that Did Not Bark: A Defense of Return Predictability

Posted: 8 Aug 2008

See all articles by John H. Cochrane

John H. Cochrane

Hoover Institution; National Bureau of Economic Research (NBER)

Multiple version iconThere are 3 versions of this paper

Date Written: July 2008

Abstract

If returns are not predictable, dividend growth must be predictable, to generate the observed variation in divided yields. I find that the absence of dividend growth predictability gives stronger evidence than does the presence of return predictability. Long-horizon return forecasts give the same strong evidence. These tests exploit the negative correlation of return forecasts with dividend-yield autocorrelation across samples, together with sensible upper bounds on dividend-yield autocorrelation, to deliver more powerful statistics. I reconcile my findings with the literature that finds poor power in long-horizon return forecasts, and with the literature that notes the poor out-of-sample R2 of return-forecasting regressions.

Keywords: G12, G14, C22

Suggested Citation

Cochrane, John H., The Dog that Did Not Bark: A Defense of Return Predictability (July 2008). The Review of Financial Studies, Vol. 21, Issue 4, pp. 1533-1575, 2008, Available at SSRN: https://ssrn.com/abstract=1212064 or http://dx.doi.org/10.1093/rfs/hhm046

John H. Cochrane (Contact Author)

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