Kellard, Neil M and Nankervis, John C and Papadimitriou, Fotios I (2010) Predicting the equity premium with dividend ratios: Reconciling the evidence. Journal of Empirical Finance, 17 (4). pp. 539-551. DOI https://doi.org/10.1016/j.jempfin.2010.04.002
Kellard, Neil M and Nankervis, John C and Papadimitriou, Fotios I (2010) Predicting the equity premium with dividend ratios: Reconciling the evidence. Journal of Empirical Finance, 17 (4). pp. 539-551. DOI https://doi.org/10.1016/j.jempfin.2010.04.002
Kellard, Neil M and Nankervis, John C and Papadimitriou, Fotios I (2010) Predicting the equity premium with dividend ratios: Reconciling the evidence. Journal of Empirical Finance, 17 (4). pp. 539-551. DOI https://doi.org/10.1016/j.jempfin.2010.04.002
Abstract
This paper evaluates the ability of dividend ratios to predict the equity premium. We conduct an in and out-of-sample comparative study and apply the Goyal and Welch (2003) graphical method to equity premia derived from the UK FTSE All-Share and the S&P 500 indices. Preliminary in-sample univariate regressions reveal that in both markets the equity premium contains an element of predictability. However, the considered out-of-sample models outperform the historical moving average only in the UK context. This is confirmed by the graphical diagnostic which further indicates that dividend ratios are useful predictors of UK excess returns. Our paper provides a possible explanation of why dividend ratios might be more informative in the UK market by linking these findings to the disappearing dividend phenomenon. Finally, Campbell and Shiller (1988) identities are employed to account for the time-varying properties of the dividend ratio and dividend growth processes. It is shown that by instrumenting the models with the identities, forecasting ability can be further improved. © 2010 Elsevier B.V.
Item Type: | Article |
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Uncontrolled Keywords: | Equity premium; Stock return predictability; Dividend ratios; Out-of-sample prediction |
Subjects: | H Social Sciences > HG Finance |
Divisions: | Faculty of Social Sciences Faculty of Social Sciences > Essex Business School |
SWORD Depositor: | Unnamed user with email elements@essex.ac.uk |
Depositing User: | Unnamed user with email elements@essex.ac.uk |
Date Deposited: | 15 Nov 2011 10:12 |
Last Modified: | 16 May 2024 16:35 |
URI: | http://repository.essex.ac.uk/id/eprint/1500 |