Predicting the equity premium with dividend ratios: reconciling the evidence. [Lead article]


Kellard, Neil M., Nankervis, John C. and Papadimitriou, Fotios I. (2010) Predicting the equity premium with dividend ratios: reconciling the evidence. [Lead article] Journal of Empirical Finance, 17, (4), pp. 539-551. (doi:10.1016/j.jempfin.2010.04.002).

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Description/Abstract

This paper evaluates the ability of dividend ratios to predict the equity premium. We conduct an in and out-of-sample comparative study and apply the Goyal and Welch (2003) graphical method to equity premia derived from the UK FTSE All-Share and the S&P 500 indices. Preliminary in-sample univariate regressions reveal that in both markets the equity premium contains an element of predictability. However, the considered out-of-sample models outperform the historical moving average only in the UK context. This is confirmed by the graphical diagnostic which further indicates that dividend ratios are useful predictors of UK excess returns. Our paper provides a possible explanation of why dividend ratios might be more informative in the UK market by linking these findings to the disappearing dividend phenomenon. Finally, Campbell and Shiller (1988) identities are employed to account for the time-varying properties of the dividend ratio and dividend growth processes. It is shown that by instrumenting the models with the identities, forecasting ability can be further improved.

Item Type: Article
Digital Object Identifier (DOI): doi:10.1016/j.jempfin.2010.04.002
ISSNs: 0927-5398 (print)
Keywords: equity premium, stock return predictability, dividend ratios, out-of-sample prediction
Subjects:
ePrint ID: 154593
Date :
Date Event
11 April 2010e-pub ahead of print
September 2010Published
Date Deposited: 25 May 2010 14:57
Last Modified: 18 Apr 2017 04:07
Further Information:Google Scholar
URI: http://eprints.soton.ac.uk/id/eprint/154593

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