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Local Trends in Price‐to‐Dividend Ratios—Assessment, Predictive Value, and Determinants

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  • HELMUT HERWARTZ
  • MALTE RENGEL
  • FANG XU

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 favorable 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.

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  • Helmut Herwartz & Malte Rengel & Fang Xu, 2016. "Local Trends in Price‐to‐Dividend Ratios—Assessment, Predictive Value, and Determinants," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 48(8), pages 1655-1690, December.
    • Handle: RePEc:wly:jmoncb:v:48:y:2016:i:8:p:1655-1690
    DOI: 10.1111/jmcb.12370
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