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Predicting the Equity Premium with Dividend Ratios

Management science, 2003-05, Vol.49 (5), p.639-654 [Peer Reviewed Journal]

Copyright 2003 INFORMS ;Copyright Institute for Operations Research and the Management Sciences May 2003 ;ISSN: 0025-1909 ;EISSN: 1526-5501 ;DOI: 10.1287/mnsc.49.5.639.15149 ;CODEN: MNSCDI

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Title:
Predicting the Equity Premium with Dividend Ratios
Author: Goyal, Amit ; Welch, Ivo
Subjects: Business studies ; Dividend Yield ; Dividends ; Equity ; Equity Premium ; Forecasting ; Forecasting models ; Forecasting standards ; Management ; Management science ; Mathematical models ; Modeling ; Out-of-Sample Prediction ; Predictability ; Ratios ; Regression coefficients ; Securities markets ; Statistical forecasts ; Statistics ; Stock exchanges ; Stock prices ; Stock Returns ; Studies ; Time series ; Time series forecasting ; Treasury bills ; Yield
Is Part Of: Management science, 2003-05, Vol.49 (5), p.639-654
Description: Our paper suggests a simple, recursive residuals (out-of-sample) graphical approach to evaluating the predictive power of popular equity premium and stock market time-series forecasting regressions. When applied, we find that dividend ratios should have been known to have no predictive ability even prior to the 1990s, and that any seeming ability even then was driven by only two years, 1973 and 1974. 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 the inability of dividend ratios to predict equity premia. Cochrane's (1997) accounting identitythat dividend ratios have to predict long-run dividend growth or stock returnsempirically holds only over horizons longer than 510 years. Over shorter horizons, dividend yields primarily forecast themselves.
Publisher: Linthicum: INFORMS
Language: English
Identifier: ISSN: 0025-1909
EISSN: 1526-5501
DOI: 10.1287/mnsc.49.5.639.15149
CODEN: MNSCDI
Source: ProQuest One Psychology
RePEc
ProQuest Central

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Predicting the Equity Premium with Dividend Ratios

Copyright 2003 INFORMS ;Copyright Institute for Operations Research and the Management Sciences May 2003 ;ISSN: 0025-1909 ;EISSN: 1526-5501 ;DOI: 10.1287/mnsc.49.5.639.15149 ;CODEN: MNSCDI

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