NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

Four Centuries of Return Predictability

Benjamin Golez, Peter Koudijs

NBER Working Paper No. 20814
Issued in December 2014, Revised in February 2017
NBER Program(s):Asset Pricing

We combine annual stock market data for the most important equity markets of the last four centuries: the Netherlands/U.K. (1629-1812), U.K. (1813-1870) and U.S. (1871-2015). We show that dividend yields are stationary and consistently forecast returns. The documented predictability holds for annual and multi-annual horizons and works both in and out-of-sample, providing strong evidence that expected returns in stock markets are time-varying. Much of this variation is related to the business cycle, with expected returns increasing in recessions. We also find that, except for the period after 1945, dividend yields predict dividend growth rates.

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Document Object Identifier (DOI): 10.3386/w20814

forthcoming at the Journal of Financial Economics

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