Our paper reexamines the forecasting regressions which predict annual aggregate stock market returns net of the risk-free rate with lagged aggregate dividend-yield ratios and dividend-price ratios. Prior to 1990, the conditional dividend yield could reliably outperform the historical equity premium mean in predicting future equity premia *in-sample*. But our paper shows that the dividend ratios could not outperform the prevailing unconditional mean *out-of-sample*, plus any residual power was directly related to only two years, 1974 and 1975. As of 2000, even this in-sample predictive ability has disappeared. Our paper also documents changes in the time-series processes of the dividends themselves and shows that an increasing persistence of dividend-price ratio is largely responsible for weak stock return predictability.
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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number
8788.
Length: Date of creation: Feb 2002 Date of revision: Handle: RePEc:nbr:nberwo:8788
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Find related papers by JEL classification: G12 - Financial Economics - - General Financial Markets - - - Asset Pricing G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies
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References listed on IDEAS Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
Ravi Jagannathan & Ellen R. McGrattan & Anna Scherbina., 2000.
"The declining U.S. equity premium,"
Quarterly Review,
Federal Reserve Bank of Minneapolis, issue Fall, pages 3-19.
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