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The predictability of aggregate Japanese stock returns: Implications of dividend yield

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  • Chen, Sichong

Abstract

This paper explores the implications of a dividend yield model for predicting aggregate Japanese stock returns using long time-series data from 1949 to 2009. In addition to one-period return tests, we conduct statistical tests based on dividend growth forecasts and long-horizon return forecasts implied by one-year regressions to provide significant evidence for the predictability of aggregate Japanese stock returns. Our findings therefore strengthen the international evidence for the role of dividend yield in predicting returns. However, we find that direct long-horizon regressions are not a powerful way of testing the null hypothesis of no return predictability. Moreover, we find that current cash flow is a more important driving force than future cash flow in the stock market fluctuations, although the dominant force is attributed to expected future returns.

Suggested Citation

  • Chen, Sichong, 2012. "The predictability of aggregate Japanese stock returns: Implications of dividend yield," International Review of Economics & Finance, Elsevier, vol. 22(1), pages 284-304.
    • Handle: RePEc:eee:reveco:v:22:y:2012:i:1:p:284-304
    DOI: 10.1016/j.iref.2011.10.009
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    More about this item

    Keywords

    Stock return predictability; Dividend yield; Japanese stock market; Dividend growth forecasts; Long-horizon return forecasts;
    All these keywords.

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
    • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes
    • C53 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Forecasting and Prediction Models; Simulation Methods

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