Abstract

http://ssrn.com/abstract=489624
 
 

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Understanding Predictability


Lior Menzly


University of Chicago - Booth School of Business

Pietro Veronesi


University of Chicago - Booth School of Business; Centre for Economic Policy Research (CEPR); National Bureau of Economic Research (NBER)

Tano Santos


Columbia Business School; National Bureau of Economic Research (NBER)


Journal of Political Economy, Vol. 112, No. 1, Pt. 1, pp. 1-47, February 2004

Abstract:     
We propose a general equilibrium model with multiple securities in which investors' risk preferences and expectations of dividend growth are time-varying. While time-varying risk preferences induce the standard positive relation between the dividend yield and expected returns, time-varying expected dividend growth induces a negative relation between them. These offsetting effects reduce the ability of the dividend yield to forecast returns and eliminate its ability to forecast dividend growth, as observed in the data. The model links the predictability of returns to that of dividend growth, suggesting specific changes to standard linear predictive regressions for both. The model's predictions are confirmed empirically.

Accepted Paper Series





Not Available For Download

Date posted: January 26, 2004  

Suggested Citation

Menzly, Lior and Veronesi, Pietro and Santos, Tano, Understanding Predictability. Journal of Political Economy, Vol. 112, No. 1, Pt. 1, pp. 1-47, February 2004. Available at SSRN: http://ssrn.com/abstract=489624

Contact Information

Lior Menzly
University of Chicago - Booth School of Business ( email )
1101 East 58th Street
c/o PhD Office
Chicago, IL 60637
United States
(773) 702-7420 (Phone)
(773) 702-5257 (Fax)
Pietro Veronesi (Contact Author)
University of Chicago - Booth School of Business ( email )
5807 S. Woodlawn Avenue
Chicago, IL 60637
United States
773-702-6348 (Phone)
773-702-0458 (Fax)
Centre for Economic Policy Research (CEPR)
77 Bastwick Street
London, EC1V 3PZ
United Kingdom
National Bureau of Economic Research (NBER)
1050 Massachusetts Avenue
Cambridge, MA 02138
United States
Tano Santos
Columbia Business School ( email )
420 West 118th Street
New York, NY 10027
United States
212-854-0489 (Phone)
212-316-9180 (Fax)

National Bureau of Economic Research (NBER)
1050 Massachusetts Avenue
Cambridge, MA 02138
United States
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