Predicting the Equity Premium with Dividend Ratios
University of Lausanne; Swiss Finance Institute
University of California, Los Angeles (UCLA); National Bureau of Economic Research (NBER)
NBER Working Paper No. w8788
Our paper reexamines the forecasting regressions which predict annual aggregate stock market returns net of the risk-free rate with lagged aggregate dividend-yield ratios and dividend-price ratios. Prior to 1990, the conditional dividend yield could reliably outperform the historical equity premium mean in predicting future equity premia *in-sample*. But our paper shows that the dividend ratios could not outperform the prevailing unconditional mean *out-of-sample*, plus any residual power was directly related to only two years, 1974 and 1975. As of 2000, even this in-sample predictive ability has disappeared. Our paper also documents changes in the time-series processes of the dividends themselves and shows that an increasing persistence of dividend-price ratio is largely responsible for weak stock return predictability.
Number of Pages in PDF File: 33working papers series
Date posted: February 14, 2002
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