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

Dooruj Rambaccussing (Lead / Corresponding author), David Power

    Research output: Contribution to journalArticlepeer-review

    1 Citation (Scopus)
    234 Downloads (Pure)

    Abstract

    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
    Volume24
    Issue number6
    Early online date8 Jun 2017
    DOIs
    Publication statusPublished - 2018

    Keywords

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

    ASJC Scopus subject areas

    • Economics, Econometrics and Finance(all)
    • Economics and Econometrics
    • Finance

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