150 Years of Return Predictability Around the World: A Holistic View Across Assets

37 Pages Posted: 29 Aug 2022 Last revised: 2 Sep 2022

See all articles by Yang Bai

Yang Bai

University of Missouri, Finance Department

Date Written: August 19, 2022

Abstract

With new annual data of 16 developed countries across bond, equity, and housing markets, I study the return predictability using the payout-price ratios, i.e., coupon price, dividend price, and rent price. None of the 48 country-asset combinations shows consistent in-sample and out-of-sample performance with positive utility gain for the mean-variance investor. Only 3 (4/2) countries show positive economic gains in their equity (housing/bond) markets. The return predictability for the representative agents’ risky asset portfolios and wealth portfolios is even weaker, suggesting that timing the investment return of a country using payout-price ratios will not make the investors better off. The predictive regressions based on the VAR analysis by Cochrane (2008, 2011) suggest that 14 (5) countries have predictable payout growth in the equity (housing) markets, ex., the dividend price predicts the dividend growth in the US. The VAR simulation using data from all the countries does not reject the null that the dividend growth is predictable. This paper presents firm evidence against the return predictability based on payout ratios.

Keywords: Bond Return Predictability, Certainty Equivalent Return, Coupon Price, Dividend Price, Dividend Predictability, Equity Return Predictability, Housing Return Predictability, Out-of-sample R-squared, Rent Price

JEL Classification: G10, G11, G12, G14

Suggested Citation

Bai, Yang, 150 Years of Return Predictability Around the World: A Holistic View Across Assets (August 19, 2022). Available at SSRN: https://ssrn.com/abstract=4196168 or http://dx.doi.org/10.2139/ssrn.4196168

Yang Bai (Contact Author)

University of Missouri, Finance Department ( email )

MO
United States

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