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The Predictability of Returns with Regime Shifts in Consumption and Dividend Growth

  • George Constantinides

    (University Of Chicago)

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    We model consumption and dividend growth as different processes across two latent regimes. We estimate the equilibrium model over 1930-2009 and show that the second regime is associated with recessions, market downturns, higher risk premia, lower consumption and dividend growth, higher volatility of returns and growth rates, and lower market-wide price-dividend ratio. The model performs better at in-sample forecasting and significantly better at out-of-sample prediction of the equity, size, and value premia and consumption and dividend growth rates and their variances than the price-dividend ratio and risk free rate do. The calibrated model replicates several features of the data.

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    File URL: https://www.economicdynamics.org/meetpapers/2012/paper_1197.pdf
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    Paper provided by Society for Economic Dynamics in its series 2012 Meeting Papers with number 1197.

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    Date of creation: 2012
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    Handle: RePEc:red:sed012:1197
    Contact details of provider: Postal: Society for Economic Dynamics Christian Zimmermann Economic Research Federal Reserve Bank of St. Louis PO Box 442 St. Louis MO 63166-0442 USA
    Fax: 1-314-444-8731
    Web page: http://www.EconomicDynamics.org/society.htm
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    21. Paye, Bradley S. & Timmermann, Allan, 2006. "Instability of return prediction models," Journal of Empirical Finance, Elsevier, vol. 13(3), pages 274-315, June.
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