The Predictability of Returns with Regime Shifts in Consumption and Dividend Growth

Anisha Ghosh and George Constantinides

No 16183, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: The predictability of the market return and dividend growth is addressed in an equilibrium model with two regimes. A state variable that drives the conditional means of the aggregate consumption and dividend growth rates follows different time-series processes in the two regimes. In linear predictive regressions over 1930-2009, the market return is predictable by the price-dividend ratio with R2 11.7% if the probability of being in the first regime exceeds 50%; and dividend growth is predictable by the price-dividend ratio with R2 28.3% if the probability of being in the second regime exceeds 50%. The model-implied state variables perform significantly better at predicting the equity, size, and value premia, the aggregate consumption and dividend growth rates, and the variance of the market return than linear regressions with the market price-dividend ratio and risk free rate as predictive variables.

JEL-codes: E44 G12 (search for similar items in EconPapers)
Date: 2010-07
Note: AP EFG
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Citations: View citations in EconPapers (6)

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Working Paper: The Predictability of Returns with Regime Shifts in Consumption and Dividend Growth (2012)
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