Fluctuations in the UK equity market: what drives stock returns?

Dooruj Rambaccussing and David Power

The European Journal of Finance, 2018, vol. 24, issue 6, 499-516

Abstract: Present value parameters from a state-space model are estimated for the UK FT All-Share Index. The estimated parameters are used to construct a time series of expected future returns and expected future values of dividend growth, both of which are found to be time-varying with persistent components. Variations in the price-dividend ratio appear to be driven primarily by the variance in expected returns. A comparison with the findings from a present value-constrained vector autoregression model indicates that the latter forecasts future realized returns and dividend growth better than the series constructed using a state-space approach. Furthermore, when the model is estimated for monthly and quarterly data, expected dividend growth is found to be more persistent.

Date: 2018
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DOI: 10.1080/1351847X.2017.1335649

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