Working Paper: NBER ID: w16263
Authors: Jules H. van Binsbergen; Ralph S.J. Koijen
Abstract: We propose a latent variables approach within a present-value model to estimate the expected returns and expected dividend growth rates of the aggregate stock market. This approach aggregates information contained in the history of price-dividend ratios and dividend growth rates to predict future returns and dividend growth rates. We find that returns and dividend growth rates are predictable with R-squared values ranging from 8.2% to 8.9% for returns and 13.9% to 31.6% for dividend growth rates. Both expected returns and expected dividend growth rates have a persistent component, but expected returns are more persistent than expected dividend growth rates.
Keywords: Predictive Regressions; Present-Value Model; Expected Returns; Expected Dividend Growth Rates
JEL Codes: C22; G11; G12; G17
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| expected returns (G17) | expected dividend growth rates (G35) |
| past price-dividend ratios (G35) | future expected returns (G17) |
| past dividend growth rates (G35) | future expected returns (G17) |
| past price-dividend ratios (G35) | future expected dividend growth rates (G35) |
| past dividend growth rates (G35) | future expected dividend growth rates (G35) |
| reinvestment strategy of dividends (G35) | volatility of dividend growth rates (G35) |
| price-dividend ratio (G35) | expected returns (G17) |
| price-dividend ratio (G35) | expected dividend growth rates (G35) |