The Predictability of Returns with Regime Shifts in Consumption and Dividend Growth
45 Pages Posted: 19 Mar 2011
There are 4 versions of this paper
The Predictability of Returns with Regime Shifts in Consumption and Dividend Growth
The Predictability of Returns with Regime Shifts in Consumption and Dividend Growth
The Predictability of Returns with Regime Shifts in Consumption and Dividend Growth
The Predictability of Returns with Regime Shifts in Consumption and Dividend Growth
Date Written: March 15, 2011
Abstract
The predictability of the market return and dividend and consumption growth is addressed in an equilibrium model with two regimes. A state variable that drives the conditional means of the aggregate consumption and dividend growth rates follows different time-series processes in the two regimes. In linear predictive regressions over 1930-2009, the market return is predictable by the market-wide price-dividend ratio with R2 11.7% if the probability of being in the first regime exceeds 50%; and dividend growth is predictable by the price-dividend ratio with R2 28.3% if the probability of being in the second regime exceeds 50%. The model-implied state variables perform significantly better at in-sample and out-of-sample prediction of the equity, size, and value premia, aggregate consumption and dividend growth rates, and variance of market return than linear regressions with the price-dividend ratio and risk free rate as predictive variables.
Keywords: Return Predictability, Consumption Growth Predictability, Dividend Growth Predictability, Regime Shifts, Cross-Section of Returns, Equity Premium, Size Premium, Value Premium
JEL Classification: G12, E44
Suggested Citation: Suggested Citation
Do you have negative results from your research you’d like to share?
Recommended Papers
-
Consumption, Aggregate Wealth and Expected Stock Returns
By Martin Lettau and Sydney C. Ludvigson
-
Risks for the Long Run: A Potential Resolution of Asset Pricing Puzzles
By Ravi Bansal and Amir Yaron
-
Dividend Yields and Expected Stock Returns: Alternative Procedures for Interference and Measurement
-
Resurrecting the (C)Capm: A Cross-Sectional Test When Risk Premia are Time-Varying
By Martin Lettau and Sydney C. Ludvigson
-
Stock Return Predictability: Is it There?
By Geert Bekaert and Andrew Ang
-
Stock Return Predictability: Is it There?
By Geert Bekaert and Andrew Ang
-
Resurrecting the (C)Capm: A Cross-Sectional Test When Risk Premia Wre Time-Varying
By Martin Lettau and Sydney C. Ludvigson