Predictive regressions: a present-value approach

Koijen, R and van Binsbergen, J H (2010) Predictive regressions: a present-value approach. Journal of Finance, 65 (4). pp. 1439-1471. ISSN 0022-1082

Abstract

We propose a latent variables approach within a present-value model to estimate the expected returns and expected dividend growth rates of the aggregate stock market. This approach aggregates information contained in the history of price-dividend ratios and dividend growth rates to predict future returns and dividend growth rates. We find that returns and dividend growth rates are predictable with values ranging from 8.2% to 8.9% for returns and 13.9% to 31.6% for dividend growth rates. Both expected returns and expected dividend growth rates have a persistent component, but expected returns are more persistent than expected dividend growth rates.