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Four Centuries of Return Predictability

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  • Benjamin Golez
  • Peter Koudijs

Abstract

We combine annual stock market data for the most important equity markets of the last four centuries: the Netherlands/U.K. (1629-1812), U.K. (1813-1870) and U.S. (1871-2015). We show that dividend yields are stationary and consistently forecast returns. The documented predictability holds for annual and multi-annual horizons and works both in and out-of-sample, providing strong evidence that expected returns in stock markets are time-varying. Much of this variation is related to the business cycle, with expected returns increasing in recessions. We also find that, except for the period after 1945, dividend yields predict dividend growth rates.

Suggested Citation

  • Benjamin Golez & Peter Koudijs, 2014. "Four Centuries of Return Predictability," NBER Working Papers 20814, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberwo:20814
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    References listed on IDEAS

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    Cited by:

    1. Andreas Neuhierl & Michael Weber & Michael Weber, 2016. "Monetary Policy and the Stock Market: Time-Series Evidence," CESifo Working Paper Series 6199, CESifo.
    2. Gebka, Bartosz & Wohar, Mark E., 2019. "Stock return distribution and predictability: Evidence from over a century of daily data on the DJIA index," International Review of Economics & Finance, Elsevier, vol. 60(C), pages 1-25.
    3. le Bris, David & Goetzmann, William N. & Pouget, Sébastien, 2019. "The present value relation over six centuries: The case of the Bazacle company," Journal of Financial Economics, Elsevier, vol. 132(1), pages 248-265.
    4. Andreas Neuhierl & Michael Weber, 2016. "Monetary Policy and the Stock Market: Time-Series Evidence," NBER Working Papers 22831, National Bureau of Economic Research, Inc.
    5. Møller, Stig V. & Sander, Magnus, 2017. "Dividends, earnings, and predictability," Journal of Banking & Finance, Elsevier, vol. 78(C), pages 153-163.

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    More about this item

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G17 - Financial Economics - - General Financial Markets - - - Financial Forecasting and Simulation
    • N2 - Economic History - - Financial Markets and Institutions

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