The existence and source of stock return predictability: Evidence from dividend, output and consumption ratios

This article considers stock return predictability and its source using ratios derived from stock prices, dividends, output and consumption. We analyse 29 stock markets (sampled quarterly) and s17 stock markets (sampled annually). One-period ahead predictive regressions provide some support for predictability of returns although there is also evidence supporting dividend and consumption growth predictability. Greater evidence for predictable stock market returns is found when estimating panel regressions and through consideration of long-horizon predictability. Furthermore, examining long horizons allows us to comment on the source of predictability. Our results suggest that predictability arises from both time variation in expected returns (risk appetite) and cash flow.