Rediscover Predictability: Information from the Relative Prices of Long-Term and Short-Term Dividends

Fisher College of Business Working Paper No. 2018-03-016

Charles A. Dice Center Working Paper No. 2018-16

69 Pages Posted: 14 Feb 2018 Last revised: 17 Oct 2018

See all articles by Ye Li

Ye Li

Ohio State University

Chen Wang

Yale School of Management

Date Written: October 16, 2018

Abstract

The ratio of long- to short-term dividend prices, “price ratio” (pr), predicts annual market return with an out-of-sample R2 of 19%, subsuming the predictive power of price-dividend ratio (pd). After controlling for pr, pd predicts dividend growth with an out-of-sample R2 of 30%. Our results hold outside the U.S. An exponential-affine model shows that the key to our findings is the (lack of) persistence of expected dividend growth. We find the expected return is countercyclical and responds strongly to monetary policy shocks. As implied by ICAPM, shocks to pr, the expected-return proxy, are priced in the cross section.

Keywords: return predictability, cash flow predictability, dividend strip price, ICAPM, time-varying expected return

JEL Classification: G12

Suggested Citation

Li, Ye and Wang, Chen, Rediscover Predictability: Information from the Relative Prices of Long-Term and Short-Term Dividends (October 16, 2018). Fisher College of Business Working Paper No. 2018-03-016. Available at SSRN: https://ssrn.com/abstract=3116437 or http://dx.doi.org/10.2139/ssrn.3116437

Ye Li

Ohio State University ( email )

Fisher Hall 836, 2100 Neil Ave
Columbus, OH 43210
United States

HOME PAGE: http://yeli-macrofinance.com

Chen Wang (Contact Author)

Yale School of Management ( email )

135 Prospect Street
P.O. Box 208200
New Haven, CT 06520-8200
United States

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