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Predicting the Equity Premium With Dividend Ratios

Listed author(s):
  • Amit Goyal
  • Ivo Welch

Our paper reexamines the forecasting regressions which predict annual aggregate stock market returns net of the risk-free rate with lagged aggregate dividend-yield ratios and dividend-price ratios. Prior to 1990, the conditional dividend yield could reliably outperform the historical equity premium mean in predicting future equity premia *in-sample*. But our paper shows that the dividend ratios could not outperform the prevailing unconditional mean *out-of-sample*, plus any residual power was directly related to only two years, 1974 and 1975. As of 2000, even this in-sample predictive ability has disappeared. Our paper also documents changes in the time-series processes of the dividends themselves and shows that an increasing persistence of dividend-price ratio is largely responsible for weak stock return predictability.

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File URL: http://www.nber.org/papers/w8788.pdf
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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 8788.

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Date of creation: Feb 2002
Publication status: published as Goyal, Amit, and Ivo Welch. "Predicting the Equity Premium With Dividend Ratios." Management Science 49-5 (May 2003): 639-654.
Handle: RePEc:nbr:nberwo:8788
Note: AP CF
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