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Time varying stock return predictability: Evidence from US sectors

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  • Guidolin, Massimo
  • McMillan, David G.
  • Wohar, Mark E.

Abstract

This paper argues that dividend yield stock return predictability is time-varying. We conjecture that such time-variation is linked to the business cycle. Employing monthly data for US sector portfolios we estimate 5-year rolling fixed window predictive regressions. The resulting series of time-varying predictive coefficients is regressed on industrial production growth and a recession dummy. Our results support the view of a negative relationship between predictability and output growth. That is the strength of the predictive relationship between returns and the dividend yield is stronger during contractionary periods, while during expansions the magnitude of the relationship declines.

Suggested Citation

  • Guidolin, Massimo & McMillan, David G. & Wohar, Mark E., 2013. "Time varying stock return predictability: Evidence from US sectors," Finance Research Letters, Elsevier, vol. 10(1), pages 34-40.
  • Handle: RePEc:eee:finlet:v:10:y:2013:i:1:p:34-40
    DOI: 10.1016/j.frl.2012.07.002
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    References listed on IDEAS

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    Cited by:

    1. McMillan, David G., 2014. "Stock return, dividend growth and consumption growth predictability across markets and time: Implications for stock price movement," International Review of Financial Analysis, Elsevier, vol. 35(C), pages 90-101.
    2. Leirvik, Thomas, 2014. "The bond–stock mix under time-varying interest rates and predictable stock returns," Finance Research Letters, Elsevier, vol. 11(3), pages 231-237.
    3. Lindaas, Knut F. & Simlai, Prodosh, 2014. "The value premium, aggregate risk innovations, and average stock returns," Finance Research Letters, Elsevier, vol. 11(3), pages 303-317.
    4. McMillan, David G., 2019. "Predicting firm level stock returns: Implications for asset pricing and economic links," The British Accounting Review, Elsevier, vol. 51(4), pages 333-351.
    5. Önder, Ali Sina & Yilmazkuday, Hakan, 2016. "Trade partner diversification and growth: How trade links matter," Journal of Macroeconomics, Elsevier, vol. 50(C), pages 241-258.
    6. Chen, Xiaoyu & Chiang, Thomas C., 2016. "Stock returns and economic forces—An empirical investigation of Chinese markets," Global Finance Journal, Elsevier, vol. 30(C), pages 45-65.
    7. Devpura, Neluka & Narayan, Paresh Kumar & Sharma, Susan Sunila, 2018. "Is stock return predictability time-varying?," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 52(C), pages 152-172.

    More about this item

    Keywords

    Predictability; Time-varying risk premia; Dividend yield; Rolling regressions;

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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