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Long-horizon equity return predictability: some new evidence for the United Kingdom

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  • Anne Vila Wetherilt
  • Simon Wells

Abstract

This paper revisits the issue of long-horizon equity return predictability for the United Kingdom in the context of the dynamic dividend discount model of Campbell and Shiller. This model attributes predictable variation in equity prices to predictable variation in expected returns. The model is supported by the theoretical asset pricing literature, which shows how the variation in expected returns can be related to investors' time-varying preferences for risk. The paper considers various empirical specifications that are consistent with the Campbell and Shiller model and finds that they are supported by UK equity data. In particular, there is weak evidence that the dividend yield has predictive ability for long-horizon excess returns. The paper also examines some of the econometric issues brought up by recent research, in particular the small-sample bias, and applies appropriate statistical corrections. It further shows that the model's predictive ability depends greatly on the sample period over which the model is estimated.

Suggested Citation

  • Anne Vila Wetherilt & Simon Wells, 2004. "Long-horizon equity return predictability: some new evidence for the United Kingdom," Bank of England working papers 244, Bank of England.
  • Handle: RePEc:boe:boeewp:244
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    File URL: http://www.bankofengland.co.uk/research/Documents/workingpapers/2004/WP244.pdf
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    References listed on IDEAS

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    Cited by:

    1. Ai Deng, 2014. "Understanding Spurious Regression in Financial Economics," The Journal of Financial Econometrics, Society for Financial Econometrics, vol. 12(1), pages 122-150.
    2. Simon Price & Christoph Schleicher, 2006. "Returns to equity, investment and Q: evidence from the United Kingdom," Bank of England working papers 310, Bank of England.
    3. Catherine Georgiou, 2020. "The British Stock Market under the Structure of Market Capitalization Value: New Evidence on its Predictive Content," International Journal of Business and Economic Sciences Applied Research (IJBESAR), International Hellenic University (IHU), Kavala Campus, Greece (formerly Eastern Macedonia and Thrace Institute of Technology - EMaTTech), vol. 13(3), pages 56-69, December.
    4. Simon Price & Christoph Schleicher, 2005. "Returns To Equity, Investment And Q: Evidence From The Uk," Manchester School, University of Manchester, vol. 73(s1), pages 32-57, September.

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