When does the dividend-price ratio predict stock returns?

Research output: Contribution to journalArticle

30 Citations (Scopus)

Abstract

If the dividend-price ratio becomes I(1) while stock returns are I(0), the unbalanced predictive regression makes the predictability test more likely to indicate that the dividend-price ratio has no predictive power. This might explain why the dividend-price ratio evidences strong predictive power during one period, while it exhibits weak or no predictive power at other times. Using international data, this paper demonstrates that the dividend-price ratio generally has predictive power for stock returns when both are I(0). However, this paper also shows that the dividend-price ratio loses its predictive power when it becomes I(1). The results are shown to be robust across countries.

Original languageEnglish
Pages (from-to)81-101
Number of pages21
JournalJournal of Empirical Finance
Volume17
Issue number1
DOIs
Publication statusPublished - 2010 Jan

Keywords

  • Change in persistence
  • Dividend-price ratio
  • Predictability
  • Stock returns

ASJC Scopus subject areas

  • Finance
  • Economics and Econometrics

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