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The Persistence and Predictive Power of the Dividend-Price Ratio

Author

Listed:
  • Cheolbeom Park

    () (Department of Economics, National University of Singapore)

Abstract

This paper presents strong statistical evidence that the dividend- price ratio in the US has experienced a change in persistence from I(0) to I(1), while stock returns have not. This provides an econometric explanation why the predictive power of the dividend-price ratio in the US has changed drastically. When the dividend-price ratio is I(0), it can have predictive power for future stock returns by the force of the cointegration relation between dividends and stock prices. However, if the dividend-price ratio becomes I(1), then it should have no predictive power for stock returns which have not experienced a change in persistence and are well known to be I(0). This relation between the persistence and the predictive power of the dividend-price ratio is well observed not only in the US but also in Japan, although the underlying causes and directions of the change in persistence appear different in the two countries.

Suggested Citation

  • Cheolbeom Park, 2006. "The Persistence and Predictive Power of the Dividend-Price Ratio," Departmental Working Papers wp0603, National University of Singapore, Department of Economics.
  • Handle: RePEc:nus:nusewp:wp0603
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    File URL: http://www.fas.nus.edu.sg/ecs/pub/wp/wp0603.pdf
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    References listed on IDEAS

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    More about this item

    Keywords

    Change in persistence; Dividend-price ratio; Predictability; Stock returns;

    JEL classification:

    • C12 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Hypothesis Testing: General
    • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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