Dividend Momentum and Stock Return Predictability: A Bayesian Approach

79 Pages Posted: 6 Oct 2021 Last revised: 13 Feb 2024

See all articles by Juan Antolin-Diaz

Juan Antolin-Diaz

London Business School - Department of Economics

Ivan Petrella

University of Warwick - Finance Group; University of Warwick - Warwick Business School; University of Warwick; Centre for Economic Policy Research (CEPR)

Juan F. Rubio-Ramírez

Emory University; Foundation for Applied Economic Research (FEDEA); Federal Reserve Banks - Federal Reserve Bank of Atlanta; BBVA Research

Multiple version iconThere are 2 versions of this paper

Date Written: October 5, 2021

Abstract

A long tradition in macro-finance studies the joint dynamics of aggregate stock returns and dividends using vector autoregressions (VARs), imposing the cross-equation restrictions implied by the Campbell-Shiller (CS) identity to sharpen inference. We take a Bayesian perspective and develop methods to draw from any posterior distribution of a VAR that encodes a priori skepticism about large amounts of return predictability while imposing the CS restrictions. In doing so, we show how a common empirical practice of omitting dividend growth from the system amounts to imposing the extra restriction that dividend growth is not persistent. We highlight that persistence in dividend growth induces a previously overlooked channel for return predictability, which we label ``dividend momentum.'' Compared to estimation based on OLS, our restricted informative prior leads to a much more moderate, but still significant, degree of return predictability, with forecasts that are helpful out-of-sample and realistic asset allocation prescriptions with Sharpe ratios that out-perform common benchmarks.

JEL Classification: C32, C53, G11, G12, E47

Suggested Citation

Antolin-Diaz, Juan and Petrella, Ivan and Petrella, Ivan and Petrella, Ivan and Rubio Ramírez, Juan, Dividend Momentum and Stock Return Predictability: A Bayesian Approach (October 5, 2021). WBS Finance Group Research Paper, Available at SSRN: https://ssrn.com/abstract=3936618 or http://dx.doi.org/10.2139/ssrn.3936618

Juan Antolin-Diaz

London Business School - Department of Economics ( email )

Sussex Place
Regent's Park
London NW1 4SA
United Kingdom

Ivan Petrella (Contact Author)

University of Warwick - Finance Group ( email )

Gibbet Hill Rd
Coventry, CV4 7AL
Great Britain

University of Warwick - Warwick Business School ( email )

Coventry CV4 7AL
United Kingdom

University of Warwick ( email )

Gibbet Hill Rd.
Coventry, West Midlands CV4 8UW
United Kingdom

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

Juan Rubio Ramírez

Emory University ( email )

201 Dowman Drive
Atlanta, GA 30322
United States

Foundation for Applied Economic Research (FEDEA)

Jorge Juan 46
Madrid, 28001
Spain

Federal Reserve Banks - Federal Reserve Bank of Atlanta

1000 Peachtree Street N.E.
Atlanta, GA 30309-4470
United States

BBVA Research

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Houston, TX 77056
United States

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