Regime Shifts in Price-Dividend Ratios and Expected Stock Returns: A Present-Value Approach

Kwang Hun Choi, Chang-Jin Kim, Cheolbeom Park

Research output: Contribution to journalArticle

3 Citations (Scopus)

Abstract

We incorporate regime shifts in the mean of price-dividend ratios into the present value model of van Binsbergen and Koijen (2010) who propose a latent variable approach to modeling expected returns and dividend growth rates. We find that accounting for regime shifts results in much lower persistence of expected returns and higher volatility of expected returns, and thus higher in-sample predictability, when compared to the results from the van Binsbergen and Koijen (2010) model. We also show that the main source of the increase in the mean of price-dividend ratios in the mid-1990s is a decrease in the mean of expected returns.

Original languageEnglish
Pages (from-to)417-441
Number of pages25
JournalJournal of Money, Credit and Banking
Volume49
Issue number2-3
DOIs
Publication statusPublished - 2017 Mar 1

Keywords

  • persistence of expected returns
  • predictive regression
  • present-value approach
  • regime shifts
  • return predictability
  • state-space model

ASJC Scopus subject areas

  • Accounting
  • Finance
  • Economics and Econometrics

Fingerprint Dive into the research topics of 'Regime Shifts in Price-Dividend Ratios and Expected Stock Returns: A Present-Value Approach'. Together they form a unique fingerprint.

  • Cite this