That Is Not My Dog: Why Doesn't the Log Dividend-Price Ratio Seem to Predict Future Log Returns or Log Dividend Growths?

SFS Cavalcade Asia-Pacific 2017 Annual Meeting (Beijing), AFA 2019 Annual Meeting (Atlanta)

40 Pages Posted: 18 Apr 2018 Last revised: 18 Jun 2021

See all articles by Philip H. Dybvig

Philip H. Dybvig

Washington University in St. Louis - John M. Olin Business School

Huacheng Zhang

Southwestern University of Finance and Economics - Institute of Financial Studies

Date Written: December 18, 2018

Abstract

Campbell and Shiller’s “accounting identity” implies that the log dividend-price ratio (LDPR) predicts either returns or dividend growths, but neither is significantly predictable, a well-known puzzle. Existence of the long-term mean LDPR is an important assumption behind the accounting identity, but it appears that the LDPR is declining over time and therefore the long-term mean does not exist. However, the identity works well in our sample. The dividend growths (but not returns) are predictable in longer samples, but results vary by subsample. We conclude that the puzzle comes from lack of power: The first-order characteristic of stock returns is noise.

Keywords: return predictability, dividend-price ratio, stationarity test

JEL Classification: G12, G17

Suggested Citation

Dybvig, Philip H. and Zhang, Huacheng, That Is Not My Dog: Why Doesn't the Log Dividend-Price Ratio Seem to Predict Future Log Returns or Log Dividend Growths? (December 18, 2018). SFS Cavalcade Asia-Pacific 2017 Annual Meeting (Beijing), AFA 2019 Annual Meeting (Atlanta), Available at SSRN: https://ssrn.com/abstract=3123595 or http://dx.doi.org/10.2139/ssrn.3123595

Philip H. Dybvig (Contact Author)

Washington University in St. Louis - John M. Olin Business School ( email )

One Brookings Drive
Campus Box 1133
St. Louis, MO 63130-4899
United States

Huacheng Zhang

Southwestern University of Finance and Economics - Institute of Financial Studies ( email )

55 Guanghuacun St,
Chengdu, Sichuan 610074
China

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