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Dividend growth and equity premium predictability

Author

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  • Zhu, Min
  • Chen, Rui
  • Du, Ke
  • Wang, You-Gan

Abstract

This paper studies dividend growth predictability without restricting the conditioning information set to dividend yield alone. We highlight that predictability crucially hinges on how dividend growth is constructed. While there is little predictability in the market-reinvested dividend growth, the pure dividend growth is significantly predictable both in-sample and out-of-sample by a number of economic fundamentals. This strong pure dividend growth predictability leads to improved equity premium prediction under the present-value framework.

Suggested Citation

  • Zhu, Min & Chen, Rui & Du, Ke & Wang, You-Gan, 2018. "Dividend growth and equity premium predictability," International Review of Economics & Finance, Elsevier, vol. 56(C), pages 125-137.
    • Handle: RePEc:eee:reveco:v:56:y:2018:i:c:p:125-137
    DOI: 10.1016/j.iref.2017.10.020
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    Cited by:

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    3. Yun, Jaeho, 2020. "A re-examination of the predictability of stock returns and cash flows via the decomposition of VIX," Economics Letters, Elsevier, vol. 186(C).
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    More about this item

    Keywords

    Dividend growth; Equity premium; Predictability;
    All these keywords.

    JEL classification:

    • C16 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Econometric and Statistical Methods; Specific Distributions
    • C53 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Forecasting and Prediction Models; Simulation Methods
    • C61 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Optimization Techniques; Programming Models; Dynamic Analysis
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions

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