Predicting the Equity Premium With Dividend Ratios / Amit Goyal, Ivo Welch.

Format:

Book

Author/Creator:

Goyal, Amit.

Contributor:

National Bureau of Economic Research.

Welch, Ivo.

Series:

Working Paper Series (National Bureau of Economic Research) no. w8788.

NBER working paper series no. w8788

Language:

English

Physical Description:

1 online resource: illustrations (black and white);

Place of Publication:

Cambridge, Mass. National Bureau of Economic Research 2002.

Summary:

Our paper reexamines the forecasting regressions which predict annual aggregate stock market returns net of the risk-free rate with lagged aggregate dividend-yield ratios and dividend-price ratios. Prior to 1990, the conditional dividend yield could reliably outperform the historical equity premium mean in predicting future equity premia *in-sample*. But our paper shows that the dividend ratios could not outperform the prevailing unconditional mean *out-of-sample*, plus any residual power was directly related to only two years, 1974 and 1975. As of 2000, even this in-sample predictive ability has disappeared. Our paper also documents changes in the time-series processes of the dividends themselves and shows that an increasing persistence of dividend-price ratio is largely responsible for weak stock return predictability.

Notes:

Print version record

February 2002.