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The Predictability of Returns with Regime Shifts in Consumption and Dividend Growth

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  • George Constantinides

    (University Of Chicago)

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    Abstract

    We model consumption and dividend growth as different processes across two latent regimes. We estimate the equilibrium model over 1930-2009 and show that the second regime is associated with recessions, market downturns, higher risk premia, lower consumption and dividend growth, higher volatility of returns and growth rates, and lower market-wide price-dividend ratio. The model performs better at in-sample forecasting and significantly better at out-of-sample prediction of the equity, size, and value premia and consumption and dividend growth rates and their variances than the price-dividend ratio and risk free rate do. The calibrated model replicates several features of the data.

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    File URL: http://www.economicdynamics.org/meetpapers/2012/paper_1197.pdf
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    Bibliographic Info

    Paper provided by Society for Economic Dynamics in its series 2012 Meeting Papers with number 1197.

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    Date of creation: 2012
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    Handle: RePEc:red:sed012:1197

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    Postal: Society for Economic Dynamics Christian Zimmermann Economic Research Federal Reserve Bank of St. Louis PO Box 442 St. Louis MO 63166-0442 USA
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    17. Jules H. van Binsbergen & Ralph S.J. Koijen, 2010. "Predictive Regressions: A Present-value Approach," NBER Working Papers 16263, National Bureau of Economic Research, Inc.
    18. Fama, Eugene F. & French, Kenneth R., 1993. "Common risk factors in the returns on stocks and bonds," Journal of Financial Economics, Elsevier, vol. 33(1), pages 3-56, February.
    19. John H. Cochrane, 2006. "The Dog That Did Not Bark: A Defense of Return Predictability," NBER Working Papers 12026, National Bureau of Economic Research, Inc.
    20. George M. Constantinides & Jens Carsten Jackwerth & Alexi Savov, 2012. "The Puzzle of Index Option Returns," Working Paper Series of the Department of Economics, University of Konstanz 2012-35, Department of Economics, University of Konstanz.
    21. John Y. Campbell & Robert J. Shiller, 1986. "The Dividend-Price Ratio and Expectations of Future Dividends and Discount Factors," NBER Working Papers 2100, National Bureau of Economic Research, Inc.
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