IDEAS home Printed from https://ideas.repec.org/a/wsi/qjfxxx/v02y2012i03ns2010139212500127.html
   My bibliography  Save this article

Filtering Out Expected Dividends and Expected Returns

Author

Listed:
  • Oleg Rytchkov

    (Fox School of Business, Temple University, 1801 Liacouras Walk, 423 Alter Hall (006-01), Philadelphia, PA 19122, USA)

Abstract

This paper applies a state space approach to the analysis of stock return predictability. It acknowledges that expected returns and expected dividends are unobservable and uses the Kalman filter to extract them from the observed history of realized dividends and returns. The suggested approach explicitly takes into account the time variation in expected dividend growth rates and exploits the present value relation. The obtained predictors for future returns are robust to structural breaks in the means of expected dividends and returns and more efficient than the dividend–price ratio. The likelihood ratio test reliably rejects the hypothesis of constant expected returns.

Suggested Citation

  • Oleg Rytchkov, 2012. "Filtering Out Expected Dividends and Expected Returns," Quarterly Journal of Finance (QJF), World Scientific Publishing Co. Pte. Ltd., vol. 2(03), pages 1-56.
    • Handle: RePEc:wsi:qjfxxx:v:02:y:2012:i:03:n:s2010139212500127
    DOI: 10.1142/S2010139212500127
    as

    Download full text from publisher

    File URL: http://www.worldscientific.com/doi/abs/10.1142/S2010139212500127
    Download Restriction: Access to full text is restricted to subscribers
    File URL: https://libkey.io/10.1142/S2010139212500127?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to search for a different version of it.

    References listed on IDEAS

    as
    1. Campbell, John Y, 1990. "Measuring the Persistence of Expected Returns," American Economic Review, American Economic Association, vol. 80(2), pages 43-47, May.
    2. Wachter, Jessica A. & Warusawitharana, Missaka, 2015. "What is the chance that the equity premium varies over time? Evidence from regressions on the dividend-price ratio," Journal of Econometrics, Elsevier, vol. 186(1), pages 74-93.
    3. Durbin, James & Koopman, Siem Jan, 2012. "Time Series Analysis by State Space Methods," OUP Catalogue, Oxford University Press, edition 2, number 9780199641178, Decembrie.
    4. Jessica A. Wachter & Missaka Warusawitharana, 2009. "What is the chance that the equity premium varies over time? evidence from predictive regressions," Finance and Economics Discussion Series 2009-26, Board of Governors of the Federal Reserve System (U.S.).
    5. Amir Yaron & Ravi Bansal, 2007. "The Asset Pricing Macro Nexus and Return Cash-Flow Predictability," 2007 Meeting Papers 18, Society for Economic Dynamics.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Davide Delle Monache & Ivan Petrella & Fabrizio Venditti, 2021. "Price Dividend Ratio and Long-Run Stock Returns: A Score-Driven State Space Model," Journal of Business & Economic Statistics, Taylor & Francis Journals, vol. 39(4), pages 1054-1065, October.
    2. Dooruj McRambaccussing, 2015. "Moment Matching in the Present Value identity, and a New Model," Dundee Discussion Papers in Economics 291, Economic Studies, University of Dundee.
    3. Albert S. Kyle & Anna Obizhaeva & Yajun Wang, 2016. "Beliefs Aggregation and Return Predictability," Working Papers w0231, Center for Economic and Financial Research (CEFIR).
    4. Ilaria Piatti & Fabio Trojani, 2020. "Dividend Growth Predictability and the Price–Dividend Ratio," Management Science, INFORMS, vol. 66(1), pages 130-158, January.
    5. Nazliben, K. Korhan & Rodríguez, Juan Carlos, 2018. "Permanent shocks, signal extraction, and portfolio selection," Journal of Economic Dynamics and Control, Elsevier, vol. 92(C), pages 47-68.
    6. Golinski, Adam & Madeira, Joao & Rambaccussing, Dooruj, 2014. "Fractional Integration of the Price-Dividend Ratio in a Present-Value Model of Stock Prices," SIRE Discussion Papers 2015-79, Scottish Institute for Research in Economics (SIRE).
    7. Golinski, Adam & Madeira, Joao & Rambaccussing, Dooruj, 2014. "Fractional Integration of the Price-Dividend Ratio in a Present-Value Model," MPRA Paper 58554, University Library of Munich, Germany.
    8. Albert S. Kyle & Anna A. Obizhaeva & Yajun Wang, 2023. "Beliefs Aggregation and Return Predictability," Journal of Finance, American Finance Association, vol. 78(1), pages 427-486, February.
    9. Kwang Hun Choi & Chang‐Jin Kim & Cheolbeom Park, 2017. "Regime Shifts in Price‐Dividend Ratios and Expected Stock Returns: A Present‐Value Approach," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 49(2-3), pages 417-441, March.
    10. Dahlquist, Magnus & Pénasse, Julien, 2022. "The missing risk premium in exchange rates," Journal of Financial Economics, Elsevier, vol. 143(2), pages 697-715.
    11. He, Zhongzhi (Lawrence) & Zhu, Jie & Zhu, Xiaoneng, 2015. "Dynamic factors and asset pricing: International and further U.S. evidence," Pacific-Basin Finance Journal, Elsevier, vol. 32(C), pages 21-39.
    12. Helmut Herwartz & Malte Rengel & Fang Xu, 2016. "Local Trends in Price‐to‐Dividend Ratios—Assessment, Predictive Value, and Determinants," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 48(8), pages 1655-1690, December.
    13. Albert S. Kyle & Anna Obizhaeva & Yajun Wang, 2016. "Beliefs Aggregation and Return Predictability," Working Papers w0231, New Economic School (NES).
    14. Irina Zviadadze, 2021. "Term Structure of Risk in Expected Returns [Stock returns and volatility: Pricing the short-run and long-run components of market risk]," The Review of Financial Studies, Society for Financial Studies, vol. 34(12), pages 6032-6086.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Missaka Warusawitharana, 2011. "The expected real return to equity," Finance and Economics Discussion Series 2011-14, Board of Governors of the Federal Reserve System (U.S.).
    2. Jessica A. Wachter, 2010. "Asset Allocation," Annual Review of Financial Economics, Annual Reviews, vol. 2(1), pages 175-206, December.
    3. Victor Bystrov, 2018. "Measuring the Natural Rates of Interest in Germany and Italy," Central European Journal of Economic Modelling and Econometrics, Central European Journal of Economic Modelling and Econometrics, vol. 10(4), pages 333-353, December.
    4. Yukai Yang & Luc Bauwens, 2018. "State-Space Models on the Stiefel Manifold with a New Approach to Nonlinear Filtering," Econometrics, MDPI, vol. 6(4), pages 1-22, December.
    5. Fernández-Macho, Javier, 2008. "Spectral estimation of a structural thin-plate smoothing model," Computational Statistics & Data Analysis, Elsevier, vol. 53(1), pages 189-195, September.
    6. Drew Creal & Siem Jan Koopman & Eric Zivot, 2008. "The Effect of the Great Moderation on the U.S. Business Cycle in a Time-varying Multivariate Trend-cycle Model," Tinbergen Institute Discussion Papers 08-069/4, Tinbergen Institute.
    7. Avanzi, Benjamin & Taylor, Greg & Vu, Phuong Anh & Wong, Bernard, 2020. "A multivariate evolutionary generalised linear model framework with adaptive estimation for claims reserving," Insurance: Mathematics and Economics, Elsevier, vol. 93(C), pages 50-71.
    8. François R. Velde, 2009. "Chronicle of a Deflation Unforetold," Journal of Political Economy, University of Chicago Press, vol. 117(4), pages 591-634, August.
    9. Chen, Peimin & Wu, Chunchi, 2014. "Default prediction with dynamic sectoral and macroeconomic frailties," Journal of Banking & Finance, Elsevier, vol. 40(C), pages 211-226.
    10. repec:zbw:bofitp:2019_008 is not listed on IDEAS
    11. Yue Zhao & Difang Wan, 2018. "Institutional high frequency trading and price discovery: Evidence from an emerging commodity futures market," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 38(2), pages 243-270, February.
    12. Wen Xu, 2016. "Estimation of Dynamic Panel Data Models with Stochastic Volatility Using Particle Filters," Econometrics, MDPI, vol. 4(4), pages 1-13, October.
    13. Park, Donghyun & Xiao, Qin, 2009. "Housing Prices and the Role of Speculation: The Case of Seoul," ADB Economics Working Paper Series 146, Asian Development Bank.
    14. Scott Brave & R. Andrew Butters & Alejandro Justiniano, 2016. "Forecasting Economic Activity with Mixed Frequency Bayesian VARs," Working Paper Series WP-2016-5, Federal Reserve Bank of Chicago.
    15. Eric Heyer & Frédéric Reynès & Henri Sterdyniak, 2004. "Observable and unobservable variables in the theory of the equilibrium rate of unemployment, a comparison between France and the United States," Working Papers hal-01027420, HAL.
    16. Hári, Norbert & De Waegenaere, Anja & Melenberg, Bertrand & Nijman, Theo E., 2008. "Estimating the term structure of mortality," Insurance: Mathematics and Economics, Elsevier, vol. 42(2), pages 492-504, April.
    17. Brave, Scott A. & Gascon, Charles & Kluender, William & Walstrum, Thomas, 2021. "Predicting benchmarked US state employment data in real time," International Journal of Forecasting, Elsevier, vol. 37(3), pages 1261-1275.
    18. Alejandro Rodriguez & Esther Ruiz, 2009. "Bootstrap prediction intervals in state–space models," Journal of Time Series Analysis, Wiley Blackwell, vol. 30(2), pages 167-178, March.
    19. Parrini, Alessandro, 2013. "Importance Sampling for Portfolio Credit Risk in Factor Copula Models," MPRA Paper 103745, University Library of Munich, Germany.
    20. Salman Huseynov, 2021. "Long and short memory in dynamic term structure models," CREATES Research Papers 2021-15, Department of Economics and Business Economics, Aarhus University.
    21. Bekaert, Geert & Engstrom, Eric & Grenadier, Steven R., 2010. "Stock and bond returns with Moody Investors," Journal of Empirical Finance, Elsevier, vol. 17(5), pages 867-894, December.

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:wsi:qjfxxx:v:02:y:2012:i:03:n:s2010139212500127. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Tai Tone Lim (email available below). General contact details of provider: http://www.worldscinet.com/qjf/qjf.shtml .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.