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Miller and Modigliani, Predictive Return Regressions and Cointegration*

Piergiorgio Alessandri, Donald Robertson and Stephen Wright ()

Oxford Bulletin of Economics and Statistics, 2008, vol. 70, issue 2, 181-207

Abstract: This paper investigates the use of alternative measures of dividend yields to predict US aggregate stock returns. Following Miller and Modigliani [Journal of Business (1961), Vol. 34, pp. 411–433] we construct a cashflow yield that includes both dividend and non‐dividend cashflows to shareholders. Using a data set covering the course of the 20th century, we show in a cointegrating vector autoregression framework that this measure has strong and stable predictive power for returns. The weak predictive power of standard measures of the dividend yield is explained by the strong rejection of the implied cointegrating and causality restrictions on the impact of non‐dividend cashflows.

Date: 2008
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https://doi.org/10.1111/j.1468-0084.2007.00499.x

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Oxford Bulletin of Economics and Statistics is currently edited by Christopher Adam, Anindya Banerjee, Christopher Bowdler, David Hendry, Adriaan Kalwij, John Knight and Jonathan Temple

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