Working Paper: NBER ID: w8788
Authors: Amit Goyal; Ivo Welch
Abstract: 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.
Keywords: No keywords provided
JEL Codes: G12; G14
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| dividend yield (G35) | future equity premiums (G12) |
| dividend yield (G35) | predictive ability (C52) |
| increasing persistence of dividend-price ratio (G35) | weak stock return predictability (G17) |
| historical predictive ability (C53) | years 1974 and 1975 (E65) |
| dividend ratios (G35) | unconditional mean in out-of-sample tests (C29) |