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Predicting returns and dividend growth — The role of non-Gaussian innovations

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  • Kiss, Tamás
  • Mazur, Stepan
  • Nguyen, Hoang

Abstract

In this paper we assess whether flexible modelling of innovations impact the predictive performance of the dividend price ratio for returns and dividend growth. Using Bayesian vector autoregressions we allow for stochastic volatility, heavy tails and skewness in the innovations. Our results suggest that point forecasts are barely affected by these features, suggesting that workhorse models on predictability are sufficient. For density forecasts, however, we find that stochastic volatility substantially improves the forecasting performance.

Suggested Citation

  • Kiss, Tamás & Mazur, Stepan & Nguyen, Hoang, 2022. "Predicting returns and dividend growth — The role of non-Gaussian innovations," Finance Research Letters, Elsevier, vol. 46(PA).
    • Handle: RePEc:eee:finlet:v:46:y:2022:i:pa:s1544612321003445
    DOI: 10.1016/j.frl.2021.102315
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    More about this item

    Keywords

    Bayesian VAR; Dividend growth predictability; Predictive regression; Return predictability;
    All these keywords.

    JEL classification:

    • C11 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Bayesian Analysis: General
    • C58 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Financial Econometrics
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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