74 Pages Posted: 5 Jun 2012 Last revised: 22 Apr 2014
Date Written: April 21, 2014
Conventional tests of present-value models over-reject the null of no predictability. In order to better account for the intrinsic probability of detecting predictive relations by chance alone, we develop a new nonparametric Monte Carlo testing method, which does not rely on distributional assumptions to aggregate the information from the time series of price-dividend ratios and dividend growth. We find evidence of return predictability, but no apparent evidence of dividend growth predictability in postwar US data, thus reconciling the diverging conclusions in the literature. Our findings are robust to the specification of the predictive information set, the choice of the sample period and the use of different cash-flow proxies.
Keywords: Predictability, Predictive regression, Present-value model, State-space model, Bootstrap, Likelihood ratio test
JEL Classification: C12, C14, C22, G12
Suggested Citation: Suggested Citation
Piatti, Ilaria and Trojani, Fabio, Dividend Growth Predictability and the Price-Dividend Ratio (April 21, 2014). Swiss Finance Institute Research Paper No. 12-42. Available at SSRN: https://ssrn.com/abstract=2077381 or http://dx.doi.org/10.2139/ssrn.2077381
By Andrew Ang