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

George Constantinides

No 1197, 2012 Meeting Papers from Society for Economic Dynamics

Abstract: We model consumption and dividend growth as different processes across two latent regimes. We estimate the equilibrium model over 1930-2009 and show that the second regime is associated with recessions, market downturns, higher risk premia, lower consumption and dividend growth, higher volatility of returns and growth rates, and lower market-wide price-dividend ratio. The model performs better at in-sample forecasting and significantly better at out-of-sample prediction of the equity, size, and value premia and consumption and dividend growth rates and their variances than the price-dividend ratio and risk free rate do. The calibrated model replicates several features of the data.

Date: 2012
New Economics Papers: this item is included in nep-for
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Working Paper: The Predictability of Returns with Regime Shifts in Consumption and Dividend Growth (2010)
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Persistent link: https://EconPapers.repec.org/RePEc:red:sed012:1197

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