NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

Dividend Yields and Expected Stock Returns: Alternative Procedures for Interference and Measurement

Robert J. Hodrick

NBER Technical Working Paper No. 108
Issued in July 1991
NBER Program(s):   ME

Alternative ways of conducting inference and measurement for long-horizon forecasting are explored with an application to dividend yields as predictors of stock returns. Monte Carlo analysis indicates that the Hansen and Hodrick (1980) procedure is biased at long horizons, but the alternatives perform better. These include an estimator derived under the null hypothesis as in Richardson and Smith (1989), a reformulation of the regression as in Jegadeesh (1990), and a vector autoregression (VAR) as in Campbell and Shiller (1988), Kandel and Stambaugh (1988), and Campbell (1991). The statistical properties of long-horizon statistics generated from the VAR indicate interesting patterns in expected stock returns.

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Published: Review of Financial Studies 5, no. 3, pp. 357-386, 1992

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