Review of Finance Vol. 19 No. 6 2015
Tug-of-War: Time-Varying Predictability of Stock Returns and Dividend Growth
Abstract
We propose a regime-switching present-value model with latent variables to jointly investigate the predictability of stock returns and dividend growth. We find that both return predictability and dividend growth predictability are time-varying. Interestingly, the predictability of stock returns and dividend growth is a tug-of-war contest: when dividend growth is highly predictable in the high-volatility regime, stock returns are largely unpredictable; in contrast, when dividend growth is less predictable in the low-volatility regime, stock returns are significantly predictable. We also investigate macroeconomic determinants of regime switches and find that two regimes are intimately related to macroeconomic risk and economic activity.
- DOI
- 10.1093/rof/rfu047
- Volume
- 19
- Issue
- 6
- Pages
- 2317-2358
- Language
- en
- Sources
- bibtex:phds-export.bib openalex crossref