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

Kwang Hun Choi; Chang Jin Kim; Cheolbeom Park

doi:10.1111/jmcb.12384

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 journal › Article › peer-review

7 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 language	English
Pages (from-to)	417-441
Number of pages	25
Journal	Journal of Money, Credit and Banking
Volume	49
Issue number	2-3
DOIs	https://doi.org/10.1111/jmcb.12384
Publication status	Published - 2017 Mar 1

Bibliographical note

Publisher Copyright:
© 2017 The Ohio State University

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

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10.1111/jmcb.12384

Cite this

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

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.",

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AU - Kim, Chang Jin

AU - Park, Cheolbeom

PY - 2017/3/1

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N2 - 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.

AB - 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.

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KW - predictive regression

KW - present-value approach

KW - regime shifts

KW - return predictability

KW - state-space model

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JO - Journal of Money, Credit and Banking

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IS - 2-3

ER -

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

Abstract

Bibliographical note

Keywords

ASJC Scopus subject areas

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