Four Centuries of Return Predictability

66 Pages Posted: 5 Jan 2015

See all articles by Benjamin Golez

Benjamin Golez

University of Notre Dame

Peter Koudijs

Stanford GSB; National Bureau of Economic Research (NBER)

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Date Written: December 2014

Abstract

We combine annual stock market data for the most important equity markets of the last four centuries: the Netherlands/U.K. (1629-1812), U.K. (1813-1870) and U.S. (1871-2015). We show that dividend yields are stationary and consistently forecast returns. The documented predictability holds for annual and multi-annual horizons and works both in and out-of-sample, providing strong evidence that expected returns in stock markets are time-varying. Much of this variation is related to the business cycle, with expected returns increasing in recessions. We also find that, except for the period after 1945, dividend yields predict dividend growth rates.

Suggested Citation

Golez, Benjamin and Koudijs, Peter, Four Centuries of Return Predictability (December 2014). NBER Working Paper No. w20814. Available at SSRN: https://ssrn.com/abstract=2545212

Benjamin Golez (Contact Author)

University of Notre Dame ( email )

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HOME PAGE: http://business.nd.edu/BenGolez/

Peter Koudijs

Stanford GSB ( email )

655 Knight Way
Stanford, CA 94305-5015
United States

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
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