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Predictive Regressions: A Present-Value Approach

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  • JULES H. van BINSBERGEN
  • RALPH S. J. KOIJEN

Abstract

We propose a latent variables approach within a present-value model to estimate the expected returns and expected dividend growth rates of the aggregate stock market. This approach aggregates information contained in the history of price-dividend ratios and dividend growth rates to predict future returns and dividend growth rates. We find that returns and dividend growth rates are predictable with   values ranging from 8.2% to 8.9% for returns and 13.9% to 31.6% for dividend growth rates. Both expected returns and expected dividend growth rates have a persistent component, but expected returns are more persistent than expected dividend growth rates. Copyright (c) 2010 the American Finance Association.

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File URL: http://www.blackwell-synergy.com/doi/abs/10.1111/j.1540-6261.2010.01575.x
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Bibliographic Info

Article provided by American Finance Association in its journal The Journal of Finance.

Volume (Year): 65 (2010)
Issue (Month): 4 (08)
Pages: 1439-1471

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Handle: RePEc:bla:jfinan:v:65:y:2010:i:4:p:1439-1471

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  1. Martin Lettau & Stijn Van Nieuwerburgh, 2006. "Reconciling the Return Predictability Evidence," NBER Working Papers 12109, National Bureau of Economic Research, Inc.
  2. Goffe, William L. & Ferrier, Gary D. & Rogers, John, 1994. "Global optimization of statistical functions with simulated annealing," Journal of Econometrics, Elsevier, vol. 60(1-2), pages 65-99.
  3. Goetzmann, William N & Jorion, Philippe, 1995. "A Longer Look at Dividend Yields," The Journal of Business, University of Chicago Press, vol. 68(4), pages 483-508, October.
  4. Wayne E. Ferson & Sergei Sarkissian & Timothy Simin, 2002. "Spurious Regressions in Financial Economics?," NBER Working Papers 9143, National Bureau of Economic Research, Inc.
  5. Chen, Long, 2009. "On the reversal of return and dividend growth predictability: A tale of two periods," Journal of Financial Economics, Elsevier, vol. 92(1), pages 128-151, April.
  6. Geert Bekaert & Steven R. Grenadier, 1999. "Stock and Bond Pricing in an Affine Economy," NBER Working Papers 7346, National Bureau of Economic Research, Inc.
  7. Amit Goval & Ivo Welch, 2004. "A Comprehensive Look at the Empirical Performance of Equity Premium Prediction," NBER Working Papers 10483, National Bureau of Economic Research, Inc.
  8. Lubos Pastor & Meenakshi Sinha & Bhaskaran Swaminathan, 2006. "Estimating the Intertemporal Risk-Return Tradeoff Using the Implied Cost of Capital," NBER Working Papers 11941, National Bureau of Economic Research, Inc.
  9. Xavier Gabaix, 2007. "Linearity-Generating Processes: A Modelling Tool Yielding Closed Forms for Asset Prices," NBER Working Papers 13430, National Bureau of Economic Research, Inc.
  10. Andrew Ang & Geert Bekaert, 2001. "Stock Return Predictability: Is it There?," NBER Working Papers 8207, National Bureau of Economic Research, Inc.
  11. Lubos Pastor & Robert F. Stambaugh, 2007. "Predictive Systems: Living with Imperfect Predictors," NBER Working Papers 12814, National Bureau of Economic Research, Inc.
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