Fluctuations in the UK Equity Market: What drives stock returns?

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Present value parameters from a state-space model are estimated for the UK FT All-Share Index. The estimated parameters are used to construct a time series of expected future returns and expected future values of dividend growth, both of which are found to be time-varying with persistent components. Variations in the price-dividend ratio appear to be driven primarily by the variance in expected returns. A comparison with the findings from a present value-constrained vector autoregression (VAR) model indicates that the latter forecasts future realized returns and dividend growth better than the series constructed using a state-space approach. Furthermore, when the model is estimated for monthly and quarterly data, expected dividend growth is found to be more persistent.
Original languageEnglish
Pages (from-to)499-516
Number of pages17
JournalEuropean Journal of Finance
Issue number6
Early online date8 Jun 2017
Publication statusPublished - 8 Jun 2017


  • State-Space model
  • UK Equity Market
  • Present value


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