Book-to-Market, Dividend Yield, and Expected Market Returns: A Time-Series Analysis
Working Paper FR 95-13
Posted: 25 Apr 1998
Date Written: July 1995
We find reliable evidence that both dividend yield and book-to-market (B/M) track time-series variation in expected real one-year stock returns over the period 1926-91 and the subperiod 1941-91. The B/M relation is stronger over the full period, while the dividend yield relation is stronger in the subperiod. For the equal-weighted index, the full- period slope coefficient on B/M is so large as to imply that expected real returns are sometimes negative, raising doubts about market efficiency. In this case, the hypothesis that expected real returns are never negative is rejected, using bootstrap methods, at the 0.02 level. A Bayesian bootstrap procedure implies that an investor with prior belief 0.5 that expected real returns are never negative comes away from the B/M evidence dramatically revising that belief, with posterior probability only about 0.05 for the hypothesis. The post-40 evidence is consistent with expected returns always being positive, however.
JEL Classification: G14
Suggested Citation: Suggested Citation