Predictive Regressions: A Present-Value Approach
Jules H. van Binsbergen
University of Pennsylvania - The Wharton School; National Bureau of Economic Research (NBER)
Ralph S. J. Koijen
London Business School - Department of Finance; Centre for Economic Policy Research (CEPR)
January 12, 2009
We propose a latent-variables approach within a present-value model to estimate the expected returns and expected dividend growth rates of the aggregate stock market. This approach aggregates information contained in the whole history of the price-dividend ratio and dividend growth rates to obtain predictors for future returns and dividend growth rates. We find that both returns and dividend growth rates are predictable with R-squared values ranging from 8.2-8.9 percent for returns and 13.9-31.6 percent for dividend growth rates. Both expected returns and expected dividend growth rates have a persistent component, but expected returns are more persistent than expected dividend growth rates.
Number of Pages in PDF File: 48
Keywords: predictive regressions, present-value models
JEL Classification: G12, C32
Date posted: March 4, 2007 ; Last revised: September 15, 2013
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