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Four centuries of return predictability

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  • Golez, Benjamin
  • Koudijs, Peter

Abstract

We combine annual stock market data for the most important equity markets of the last four centuries: the Netherlands and UK (1629–1812), UK (1813–1870), and US (1871–2015). We show that dividend yields are stationary and consistently forecast returns. The documented predictability holds for annual and multi-annual horizons and works both in- and out-of-sample, providing strong evidence that expected returns in stock markets are time-varying. In part, this variation is related to the business cycle, with expected returns increasing in recessions. We also find that, except for the period after 1945, dividend yields predict dividend growth rates.

Suggested Citation

  • Golez, Benjamin & Koudijs, Peter, 2018. "Four centuries of return predictability," Journal of Financial Economics, Elsevier, vol. 127(2), pages 248-263.
    • Handle: RePEc:eee:jfinec:v:127:y:2018:i:2:p:248-263
    DOI: 10.1016/j.jfineco.2017.12.007
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    More about this item

    Keywords

    Dividend-to-price ratio; Return predictability; Dividend growth predictability;
    All these keywords.

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G17 - Financial Economics - - General Financial Markets - - - Financial Forecasting and Simulation
    • N2 - Economic History - - Financial Markets and Institutions

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