Evaluating Predictors within a Present-Value Framework

Jhe Yun ()
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Jhe Yun: AlphaWorks Capital Management, LLC, 155 N.Wacker Drive Suite 4570, Chicago, IL 60606, USA

Quarterly Journal of Finance (QJF), 2013, vol. 03, issue 02, 1-49

Abstract: I impose functional-form restrictions on the time-series processes of expected returns and expected dividend growth rates to better estimate them in a small sample. The approach helps to aggregate information contained in the entire history of prices, dividend growth, and additional predictors without parameter proliferation. I find that both expected returns and expected dividend growth rates are substantially time-varying, positively correlated with each other, and covary with several macroeconomic variables. The estimated expectations of returns and dividend growth rates are strong predictors of realized returns and dividend growth rates, respectively, both in-sample and out-of-sample.Book-to-Market Ratio,Stock Variance,Consumption-Wealth-Income Ratio, andBAA-rated Corporate Bond Yieldsignificantly improve the return and dividend forecasts of my present-value model.

Keywords: Present-value relationship; return predictability; predictors (search for similar items in EconPapers)
Date: 2013
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DOI: 10.1142/S2010139213500080

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