Working Paper: NBER ID: w20814
Authors: Benjamin Golez; Peter Koudijs
Abstract: We combine annual stock market data for the most important equity markets of the last four centuries: the Netherlands/U.K. (1629-1812), U.K. (1813-1870) and U.S. (1871-2015). We show that dividend yields are stationary and consistently forecast returns. The documented predictability holds for annual and multi-annual horizons and works both in and out-of-sample, providing strong evidence that expected returns in stock markets are time-varying. Much of this variation is related to the business cycle, with expected returns increasing in recessions. We also find that, except for the period after 1945, dividend yields predict dividend growth rates.
Keywords: return predictability; dividend yields; business cycle
JEL Codes: G12; G17; N2
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| dividend yields (G35) | stock returns (G12) |
| dividend yields (G35) | dividend growth rates (G35) |
| recessions (E32) | expected returns (G17) |
| dividend yields (G35) | expected returns (G17) |