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Predicting the equity premium with dividend ratios: a matter of balance

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  • Peter Sephton

Abstract

Goyal and Welch (2003) used recursive residuals and plots of cumulative sum-squared errors to examine the predictive accuracy of dividend ratios in forecasting the equity premium. After a thorough specification search, Goyal and Welch were unable to find evidence in favour of dividend ratios as predictors of the equity premium. This note extends their analysis, further demonstrating the empirical fallacy.

Suggested Citation

  • Peter Sephton, 2005. "Predicting the equity premium with dividend ratios: a matter of balance," Applied Economics Letters, Taylor & Francis Journals, vol. 12(3), pages 145-147.
    • Handle: RePEc:taf:apeclt:v:12:y:2005:i:3:p:145-147
    DOI: 10.1080/1350485042000318439
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    References listed on IDEAS

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    1. Kwiatkowski, Denis & Phillips, Peter C. B. & Schmidt, Peter & Shin, Yongcheol, 1992. "Testing the null hypothesis of stationarity against the alternative of a unit root : How sure are we that economic time series have a unit root?," Journal of Econometrics, Elsevier, vol. 54(1-3), pages 159-178.
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    4. Amit Goyal & Ivo Welch, 2003. "Predicting the Equity Premium with Dividend Ratios," Management Science, INFORMS, vol. 49(5), pages 639-654, May.
    5. Leybourne, S J & McCabe, B P M, 1994. "A Consistent Test for a Unit Root," Journal of Business & Economic Statistics, American Statistical Association, vol. 12(2), pages 157-166, April.
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