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When does the dividend-price ratio predict stock returns?

  • Park, Cheolbeom

If the dividend-price ratio becomes I(1) while stock returns are I(0), the unbalanced predictive regression makes the predictability test more likely to indicate that the dividend-price ratio has no predictive power. This might explain why the dividend-price ratio evidences strong predictive power during one period, while it exhibits weak or no predictive power at other times. Using international data, this paper demonstrates that the dividend-price ratio generally has predictive power for stock returns when both are I(0). However, this paper also shows that the dividend-price ratio loses its predictive power when it becomes I(1). The results are shown to be robust across countries.

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Article provided by Elsevier in its journal Journal of Empirical Finance.

Volume (Year): 17 (2010)
Issue (Month): 1 (January)
Pages: 81-101

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Handle: RePEc:eee:empfin:v:17:y:2010:i:1:p:81-101
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