Abstract
We re-examine the dynamics of returns and dividend growth within the present-value framework of stock prices. We find that the finite sample order of integration of returns is approximately equal to the order of integration of the first-differenced price-dividend ratio. As such, the traditional return forecasting regressions based on the price-dividend ratio are invalid. Moreover, the nonstationary long memory behaviour of the price-dividend ratio induces antipersistence in returns. This suggests that expected returns should be modelled as an ARFIMA process and we show this improves the forecast ability of the present-value model in-sample and out-of-sample.
Original language | English |
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Title of host publication | International Association for Applied Econometrics |
Publisher | International Association for Applied Econometrics |
Number of pages | 45 |
Publication status | Published - Sept 2014 |
Event | International Association of Applied Econometrics 2014 Annual Conference - Queen Mary University of London, London, United Kingdom Duration: 26 Jun 2014 → 28 Jun 2014 http://www.iaae2014.org/ |
Conference
Conference | International Association of Applied Econometrics 2014 Annual Conference |
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Abbreviated title | IAAE 2014 |
Country/Territory | United Kingdom |
City | London |
Period | 26/06/14 → 28/06/14 |
Internet address |
Keywords
- price-dividend ratio
- persistence
- fractional integration
- return predictability
- present-value
ASJC Scopus subject areas
- Economics, Econometrics and Finance(all)
- Economics and Econometrics
- Finance