Long-Horizon Returns Predictability and Structural Break in Stock Exchange of Thailand
35 Pages Posted: 16 Feb 2014
Date Written: November 1, 2011
This paper examines the effect of structural break in long-run mean of dividend-price ratio and its impact on long-horizon returns predictive regression in the Stock Exchange of Thailand from April 1975 to December 2010. The empirical results show that there exists a structural break in dividend-price ratio over the sample period confirmed by both cointegration tests that allow a presence of structural break (Gregory and Hansen (1996)) and Bai and Perron (1998)’s procedure. Once we adjust the dividend-price ratio series as suggested by Lettua and Nieuwerburgh (2008), the overall estimated coefficients from regression using adjusted dividend-price ratio are bigger as well as R-squared. Interestingly, the adjusted dividend-price ratio could be properly used to predict Thai stock returns within 3-year horizons, while the adjusted dividend-price ratio seems to better predict dividend growth in longer horizons, 4- and 5-year horizons in particular.
Keywords: Long-horizon predictability, structural break, Stock Exchange of Thailand
JEL Classification: G12, E44
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