Stock Return Predictability: Is it There?

Andrew Ang and Geert Bekaert

No 8207, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: We ask whether stock returns in France, Germany, Japan, the UK and the US are predictable by three instruments: the dividend yield, the earnings yield and the short rate. The predictability regression is suggested by a present value model with earnings growth, payout ratios and the short rate as state variables. We use this model imposing a constant risk premium to examine the finite sample evidence on predictability. Not only do we find the short rate to be a relevant state variable theoretically, it is also the only robust short-run predictor of equity returns. The evidence in Lamont (1998) on earnings and dividend yield predictability is not robust to our increased sample period, does not survive finite sample corrections and does not extend to other countries. We find no evidence of long-horizon predictability once we account for finite sample influence. Finally, cross-country predictability appears stronger than predictability using local instruments.

JEL-codes: C12 C51 (search for similar items in EconPapers)
Date: 2001-04
New Economics Papers: this item is included in nep-fin and nep-fmk
Note: AP
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Citations: View citations in EconPapers (182)

Published as Ang, Andrew and Geert Bekaert. "Stock Return Predictability: Is it There?" Review of Financial Studies 20, 3 (2007): 651-707.

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