Stock Prices, Returns and Dividend Yields

54 Pages Posted: 26 Jan 2011

See all articles by Dimitrios Malliaropulos

Dimitrios Malliaropulos

University of Piraeus - Department of Banking and Financial Management; National Bank of Greece

Richard Priestley

Norwegian Business School

Date Written: January 21, 2011

Abstract

The predictive ability of the dividend-price ratio for future stock returns does not necessarily imply that dividend-price ratios predict future stock prices. Stock returns consist of both a capital gain and a dividend yield component, and we show that predictability of stock returns by lagged dividend-price ratios mainly reflects predictability of future dividend yields, which make up a significant component of average returns. We propose a novel loglinear approximation of stock returns into a capital gain and a dividend yield component and derive testable restrictions of nonpredictability of capital gains. Using Monte Carlo simulations, we show that not accounting for the dividend yield component of returns leads to overrejections of unpredictability both in one-period and multi-period tests. Our results have wide-ranging implications for the way we think financial markets work, asset pricing and asset allocation.

Keywords: Dividend-Price Ratio, Stock Returns, Predictability, Capital Gains, Dividend Yield

JEL Classification: G12, G14, C20

Suggested Citation

Malliaropulos, Dimitrios and Priestley, Richard, Stock Prices, Returns and Dividend Yields (January 21, 2011). Available at SSRN: https://ssrn.com/abstract=1747826 or http://dx.doi.org/10.2139/ssrn.1747826

Dimitrios Malliaropulos

University of Piraeus - Department of Banking and Financial Management ( email )

80 Karaoli & Dimitriou Str.
18534 Piraeus, 185 34 -GR
Greece
(+30) 210 3341527 (Phone)
(+30) 210 3341702 (Fax)

National Bank of Greece ( email )

86 Eolou Str.
10232 Athens
Greece
+30 1 3251133 (Fax)

Richard Priestley (Contact Author)

Norwegian Business School ( email )

Nydalsveien
37
N-0442 Oslo, 0283
Norway
47 46410515 (Phone)

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