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Stock Return Predictability: Is It There?

53 Pages Posted: 23 Mar 2001  

Geert Bekaert

Columbia Business School - Finance and Economics; National Bureau of Economic Research (NBER)

Andrew Ang

BlackRock, Inc

Multiple version iconThere are 2 versions of this paper

Date Written: March 4, 2001

Abstract

We ask whether stock returns in France, Germany, the UK and the US are predictable by three instruments: the dividend yield, the earnings yield and the short rate. The predictability regression is suggested by a present value model with earnings growth, payout ratios and the short rate as state variables. We use this model imposing a constant risk premium to examine the finite sample evidence on predictability. Not only do we find the short rate to be a relevant state variable theoretically, it is also the only robust short-run predictor of equity returns. The evidence in Lamont (1998) on earnings and dividend yield predictability is not robust to our increased sample period, does not survive finite sample corrections and does not extend to other countries. We find no evidence of long-horizon predictability once we account for finite sample influence. Finally, cross-country predictability appears stronger than predictability using local instruments.

Keywords: Present value model, predictability, international predictability, short rates, dividend yield, earnings yield

JEL Classification: C12, C51, C52, E49, F30, G12

Suggested Citation

Bekaert, Geert and Ang, Andrew, Stock Return Predictability: Is It There? (March 4, 2001). AFA 2002 Atlanta Meetings. Available at SSRN: https://ssrn.com/abstract=262315 or http://dx.doi.org/10.2139/ssrn.262315

Geert Bekaert

Columbia Business School - Finance and Economics ( email )

3022 Broadway
New York, NY 10027
United States

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Andrew Ang (Contact Author)

BlackRock, Inc ( email )

55 East 52nd Street
New York City, NY 10055
United States

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