Modelling Time-Variation in the Stock Return-Dividend Yield Predictive Equation

46 Pages Posted: 5 Oct 2012

Multiple version iconThere are 2 versions of this paper

Date Written: October 4, 2012

Abstract

Using data for forty markets, this paper examines the nature and possible causes of time-variation within the stock return-dividend yield predictive regression. The results in this paper show that there is significant time-variation in the predictive equation for returns and that such variation is linked to economic and market factors. Furthermore, the strength and nature of those links are themselves time-varying. The inclusion of this time-variation in the predictive equation increases the predictive power compared to the standard constant parameter predictive model. Evidence is also reported for time-varying dividend growth predictability. Long-horizon predictability is also examined with evidence reported that the nature of the factors affecting time-varying predictability changes with horizon. The results here, while directly contributing to the returns predictability debate, in particular regarding its existence and source, may also inform the discussion that links time-varying expected returns (and risk premium) to economic factors.

Keywords: Stock Returns, Predictability, Time-Variation, Dividend Growth, Panel

JEL Classification: C22, C23, G12

Suggested Citation

McMillan, David G., Modelling Time-Variation in the Stock Return-Dividend Yield Predictive Equation (October 4, 2012). Available at SSRN: https://ssrn.com/abstract=2156850 or http://dx.doi.org/10.2139/ssrn.2156850

David G. McMillan (Contact Author)

University of Stirling ( email )

Stirling, Scotland FK9 4LA
United Kingdom

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