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Price–Dividend Ratios and Stock Price Predictability

✍ Scribed by Jyh-Lin Wu; Yu-Hau Hu

Publisher
John Wiley and Sons
Year
2011
Tongue
English
Weight
231 KB
Volume
31
Category
Article
ISSN
0277-6693

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✦ Synopsis

ABSTRACT

A long‐standing puzzle to financial economists is the difficulty of outperforming the benchmark random walk model in out‐of‐sample contests. Using data from the USA over the period of 1872–2007, this paper re‐examines the out‐of‐sample predictability of real stock prices based on price–dividend (PD) ratios. The current research focuses on the significance of the time‐varying mean and nonlinear dynamics of PD ratios in the empirical analysis. Empirical results support the proposed nonlinear model of the PD ratio and the stationarity of the trend‐adjusted PD ratio. Furthermore, this paper rejects the non‐predictability hypothesis of stock prices statistically based on in‐ and out‐of‐sample tests and economically based on the criteria of expected real return per unit of risk. Copyright © 2011 John Wiley & Sons, Ltd.

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