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Time varying stock return predictability: Evidence from US sectors

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  • Guidolin, Massimo
  • McMillan, David G.
  • Wohar, Mark E.

Abstract

This paper argues that dividend yield stock return predictability is time-varying. We conjecture that such time-variation is linked to the business cycle. Employing monthly data for US sector portfolios we estimate 5-year rolling fixed window predictive regressions. The resulting series of time-varying predictive coefficients is regressed on industrial production growth and a recession dummy. Our results support the view of a negative relationship between predictability and output growth. That is the strength of the predictive relationship between returns and the dividend yield is stronger during contractionary periods, while during expansions the magnitude of the relationship declines.

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  • Guidolin, Massimo & McMillan, David G. & Wohar, Mark E., 2013. "Time varying stock return predictability: Evidence from US sectors," Finance Research Letters, Elsevier, vol. 10(1), pages 34-40.
    • Handle: RePEc:eee:finlet:v:10:y:2013:i:1:p:34-40
    DOI: 10.1016/j.frl.2012.07.002
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    5. Lindaas, Knut F. & Simlai, Prodosh, 2014. "The value premium, aggregate risk innovations, and average stock returns," Finance Research Letters, Elsevier, vol. 11(3), pages 303-317.
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    9. Hammami, Yacine & Zhu, Jie, 2020. "Understanding time-varying short-horizon predictability✰," Finance Research Letters, Elsevier, vol. 32(C).
    10. Mikihito Nishi, 2023. "Testing for Stationary or Persistent Coefficient Randomness in Predictive Regressions," Papers 2309.04926, arXiv.org, revised May 2024.
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    More about this item

    Keywords

    Predictability; Time-varying risk premia; Dividend yield; Rolling regressions;
    All these keywords.

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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