Predictive Regressions: A Present-value Approach
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 R-squared 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.
Published: van Binsbergen, Jules H. and Ralph S.J. Koijen, Predictive Regressions: A Present-Value Approach, Journal of Finance, August 2010, 65(4), 1439-1471.