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Fluctuations in the UK equity market: what drives stock returns?

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  • Dooruj Rambaccussing
  • David Power

Abstract

Present value parameters from a state-space model are estimated for the UK FT All-Share Index. The estimated parameters are used to construct a time series of expected future returns and expected future values of dividend growth, both of which are found to be time-varying with persistent components. Variations in the price-dividend ratio appear to be driven primarily by the variance in expected returns. A comparison with the findings from a present value-constrained vector autoregression model indicates that the latter forecasts future realized returns and dividend growth better than the series constructed using a state-space approach. Furthermore, when the model is estimated for monthly and quarterly data, expected dividend growth is found to be more persistent.

Suggested Citation

  • Dooruj Rambaccussing & David Power, 2018. "Fluctuations in the UK equity market: what drives stock returns?," The European Journal of Finance, Taylor & Francis Journals, vol. 24(6), pages 499-516, April.
  • Handle: RePEc:taf:eurjfi:v:24:y:2018:i:6:p:499-516
    DOI: 10.1080/1351847X.2017.1335649
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