Modelling Time-Variation in the Stock Return-Dividend Yield Predictive Equation



McMillan D (2014) Modelling Time-Variation in the Stock Return-Dividend Yield Predictive Equation. Financial Markets, Institutions and Instruments, 23 (5), pp. 273-302.

Using data for forty markets, this paper examines the nature and possible causes of time-variation within the stock return-dividend yield predictive regression. The results in this paper show that there is significant time-variation in the predictive equation for returns and that such variation is linked to economic and market factors. Furthermore, the strength and nature of those links are themselves time-varying. The inclusion of this time-variation in the predictive equation increases the predictive power compared to the standard constant parameter predictive model. Evidence is also reported for time-varying dividend growth predictability. Long-horizon predictability is also examined with evidence reported that the nature of the factors affecting time-varying predictability changes with horizon. The results here, while directly contributing to the returns predictability debate, in particular regarding its existence and source, may also inform the discussion that links time-varying expected returns (and risk premium) to economic factors.

Stock Returns;Predictability;Time-Variation;Dividend Growth;Panel;C22;C23;G12

Financial Markets, Institutions and Instruments: Volume 23, Issue 5

Publication date31/12/2014
Publication date online27/10/2014
PublisherNew York University Salomon Center and Wiley-Blackwell

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Professor David McMillan
Professor David McMillan

Professor in Finance, Accounting & Finance