Dividends, Momentum and Macroeconomic Variables as Determinants of the U.S. Equity Premium Across Economic Regimes

Review of Behavioral Finance, Forthcoming

40 Pages Posted: 28 Mar 2011 Last revised: 2 Apr 2011

A. (Tassos) G. Malliaris

Loyola University of Chicago - Department of Economics

Ramaprasad Bhar

UNSW Australia Business School, School of Banking and Finance

Date Written: March 25, 2011

Abstract

The equity premium of the S&P 500 Index is explained in this paper by several variables that can be grouped into fundamental, behavioral and macroeconomic factors. We hypothesize that the statistical significance of these variables changes across economic regimes. The three regimes we consider are the low, medium and high volatility regimes in contrast to previous studies that do not differentiate across economic regimes. Using the three-state Markov switching regime econometric methodology we confirm that the statistical significance of the independent variables representing fundamentals, macroeconomic conditions and a behavioral variable changes across economic regimes. Our findings offer an improved understanding of what moves the equity premium across economic regimes than what we can learn from single-equation estimation. Our results also confirm the significance of momentum as a behavioral variable across all economic regimes.

Keywords: Excess stock returns, equity premium, dividends, macroeconomic variables, momentum, Markov regimes

JEL Classification: C22, E44, G12

Suggested Citation

Malliaris, A. (Tassos) G. and Bhar, Ramaprasad, Dividends, Momentum and Macroeconomic Variables as Determinants of the U.S. Equity Premium Across Economic Regimes (March 25, 2011). Review of Behavioral Finance, Forthcoming. Available at SSRN: https://ssrn.com/abstract=1794267

A. (Tassos) G. Malliaris (Contact Author)

Loyola University of Chicago - Department of Economics ( email )

16 E. Pearson Ave
Quinlan School of Business
Chicago, IL 60611
United States
312-915-6063 (Phone)

Ramaprasad Bhar

UNSW Australia Business School, School of Banking and Finance ( email )

Sydney, NSW 2052
Australia

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