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.
We would also like to thank Ravi Bansal, Lieven Baele, Geert Bekaert, Alan Bester, Michael Brandt, Alon Brav, Ben Broadbent, John Campbell, Hui Chen, John Cochrane, George Constantinides, Joost Driessen, Darrell Duffie, Gene Fama, Jesus Fernandez-Villaverde, Xavier Gabaix, Eric Ghysels, Will Goetzmann, Chris Jones, Frank de Jong, Ron Kaniel, Martin Lettau, Hanno Lustig, Anthony Lynch, Toby Moskowitz, Justin Murfin, Theo Nijman, Lubos Pastor, Anamaria Pieschacon, Nick Polson, Matt Richardson, Juan Rubio-Ramirez, Yuliy Sannikov, Ken Singleton, Pilar Soriano, Allan Timmermann, Stijn Van Nieuwerburgh, Pietro Veronesi, Luis Viceira, Vish Viswanathan, Jessica Wachter, Bas Werker, Amir Yaron, and seminar participants at the WFA meetings 2008, Chicago Booth, Duke University, the Stanford-Berkeley Seminar, Tilburg University, the Rotman School, UCSD-Rady School of Management, University of Southern California, University of Wisconsin-Madison, and UCLA for useful comments and suggestions. The views expressed herein are those of the authors and do not necessarily reflect the views of the National Bureau of Economic Research.