When does the dividend-price ratio predict stock returns?

Research output: Contribution to journalArticlepeer-review

34 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

Bibliographical note

Funding Information:
I am grateful to Heejoon Han and the conference participants at FEMES 2007 and the 2007 Singapore Economic Review Conference for their helpful comments and discussion. This work was supported by the Korea Research Foundation Grant funded by the Korean Government ( KRF-2009-332-B00051 ).

Keywords

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

ASJC Scopus subject areas

  • Finance
  • Economics and Econometrics

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