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

39 Pages Posted: 29 Aug 2022 Last revised: 13 Mar 2023

See all articles by Yang Bai

Yang Bai

University of Missouri, Finance Department

Date Written: August 19, 2022

Abstract

Campbell and Shiller (1988b, a) show that a relation exists between payout growth and return. Therefore, if payout growth is not predictable, the payout-price ratio decides returns and the returns must be predictable. Using 150-year data from 16 developed countries across bond, equity, and housing markets, I study this implication 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. However, 14 (5) countries have predictable payout growth in the equity (housing) markets. Cochrane (2008, 2011, 2020) argues that the dividend predictability and the return predictability form a joint hypothesis, and the denial of time series predictability does not hold if we reject the hypothesis that the dividend growth is predictable. Contrary to Cochrane’s finding, the VAR simulation using data from all the countries in the past 150 years does not reject the null that the dividend growth is predictable and thus the joint hypothesis test provides weak support to return predictability.

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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