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Title: Local Trends in Price-to-Dividend Ratios-Assessment, Predictive Value, and Determinants
Keywords: Price-to-dividend ratio;stock return prediction;consumption risk;dividend payments;demographics;nonlinear state space model
Issue Date: 2016
Publisher: Wiley
Citation: Journal of Money, Credit and Banking, 2016, 48 (8), pp. 1655 - 1690
Abstract: Persistent variations of the log price-to-dividend ratio (PD) and their economic determinants have attracted a lively discussion in the literature. We suggest a gradually time-varying state process to govern the persistence of the PD. The adopted state space approach offers favourable model diagnostics and finds particular support in out-of-sample stock return prediction. We show that this slowly evolving mean process is jointly shaped by the consumption risk, the demographic structure and the proportion of firms with traditional dividend payout policy during the past 60 years. In particular, the volatility of consumption growth plays the dominant role.
ISSN: 0022-2879
Appears in Collections:Dept of Economics and Finance Embargoed Research Papers

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