Miller and Modigliani, Predictive Return Regressions and Co-integration

27 Pages Posted: 27 Mar 2008

See all articles by Piergiorgio Alessandri

Piergiorgio Alessandri

Bank of England

Donald Robertson

Cambridge University - Department of Economics

Stephen H. Wright

Birkbeck College, University of London

Date Written: 0000

Abstract

This paper investigates the use of alternative measures of dividend yields to predict US aggregate stock returns. Following Miller and Modigliani [Journal of Business (1961), Vol. 34, pp. 411-433] we construct a cash flow yield that includes both dividend and non-dividend cash flows to shareholders. Using a data set covering the course of the 20th century, we show in a co-integrating vector auto-regression framework that this measure has strong and stable predictive power for returns. The weak predictive power of standard measures of the dividend yield is explained by the strong rejection of the implied co-integrating and causality restrictions on the impact of non-dividend cash flows.

Suggested Citation

Alessandri, Piergiorgio and Robertson, Donald and Wright, Stephen H., Miller and Modigliani, Predictive Return Regressions and Co-integration (0000). Oxford Bulletin of Economics and Statistics, Vol. 70, Issue 2, pp. 181-207, April 2008, Available at SSRN: https://ssrn.com/abstract=1112177 or http://dx.doi.org/10.1111/j.1468-0084.2007.00499.x

Piergiorgio Alessandri (Contact Author)

Bank of England ( email )

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Donald Robertson

Cambridge University - Department of Economics ( email )

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Stephen H. Wright

Birkbeck College, University of London ( email )

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