Hostname: page-component-76fb5796d-skm99 Total loading time: 0 Render date: 2024-04-26T11:17:48.263Z Has data issue: false hasContentIssue false
  • English
  • Français

Prediction of Stock Returns: A New Way to Look at It

Published online by Cambridge University Press:  17 April 2015

Jens Perch Nielsen  and
Stefan Sperlich
Rights & Permissions [Opens in a new window]

Abstract

Core share and HTML view are not available for this content. However, as you have access to this content, a full PDF is available via the ‘Save PDF’ action button.

While the traditional R 2 value is useful to evaluate the quality of a fit, it does not work when it comes to evaluating the predictive power of estimated financial models in finite samples. In this paper we introduce a validated value useful for prediction. Based on data from the Danish stock market, using this measure we find that the dividend-price ratio has predictive power. The best horizon for prediction seems to be four years. On a one year horizon, we find that while inflation and interest rate do not add to the predictive power of the dividend-price ratio then last years excess stock return does.

Keywords

PredictionStock returnsDividend price ratioCross Validation
Type
Workshop
Information
ASTIN Bulletin: The Journal of the IAA , Volume 33 , Issue 2 , November 2003 , pp. 399 - 417
Copyright
Copyright © ASTIN Bulletin 2003

Footnotes

1

Codanhus, 60 Gammel Kongevej, DK-1790 Copenhagen V, Denmark. Email: npj@codan.dk.

2

Universidad Carlos III de Madrid, Email: stefan@est-econ.uc3m.es.

References

Barber, B.M. and Terrance, O. (2000) Trading is hazardous to your wealth: The common stock investment performance of individual investors. Journal of Finance 55, 773–806.CrossRefGoogle Scholar
Cairns, A.J.G. (2000) A discussion of parameter and model uncertainty in insurance. Insurance: Mathematics and Economics 27, 313–330.CrossRefGoogle Scholar
Campbell, J.Y. and Shiller, R.J. (1988) The dividend-price ratio and expectations of future dividends and discount factors. Review of Financial Studies 1, 195–228.CrossRefGoogle Scholar
Campbell, J.Y., Lo, A.W. and MacKinlay, A.C. (1997) The Econometrics of financial markets. Princeton University Press, Princeton, New Jersey.CrossRefGoogle Scholar
Dimson, E., Marsh, P. and Staunton, M. (2002) Triumph of the Optimists. Princeton University Press.CrossRefGoogle Scholar
Engsted, T. and Tanggård, C. (2000) The Danish stock and bond markets: Comovement, return predictability and variance decomposition. Journal of Empirical Finance 8, 243–271.CrossRefGoogle Scholar
Eun, C.S. and Resnick, B.G. (1988) Exchange rate uncertainty, forward contracts, and international portfolio selection. Journal of Finance 43, 197–215.CrossRefGoogle Scholar
Eun, C.S. and Resnick, B.G. (1994) Exchange rate uncertainty, forward contracts, and international portfolio selection. Management Science 40, 140–161.CrossRefGoogle Scholar
Fama, E. and French, K. (1988) Dividend yields and expected stock returns. Journal ofFinan-cial Economics 22, 3–25.CrossRefGoogle Scholar
Fan, J. and Gijbels, I. (1996) Local polynomial regression. Chapman and Hall, London.Google Scholar
Goetzmann, W.N. and Jorion, P. (1993) Testing the predictive power of dividend yields. Journal ofFinance 48, 663–679.CrossRefGoogle Scholar
Gordon, M. and Shapiro, P. (1956) Capital Equilibrium analysis: The required rate of profit. Management Science 3, 102–110.CrossRefGoogle Scholar
Gyöfri, L., Härdle, W., Sarda, P. and Vieu, Ph. (1990) Nonparametric Curve Estimation from Time Series. Lecture Notes in Statistics. Heidelberg: Springer-Verlag.Google Scholar
Hansen, S. (1974) Økonomisk vakst i Danmark [Economic growth in Denmark], Akademisk Forlag, Copenhagen, Denmark.Google Scholar
Harris, G.R. (1999) Marcov chain Monte Carlo estimation of regime switching vector autore-gressions. ASTIN Bulletin 29, 47–79.CrossRefGoogle Scholar
Hastie, T.J. and Tibshirani, R.J. (1990) Generalized Additive Models. Chapman and Hall.Google Scholar
Hodrick, R.J. (1992) Dividend yields and expected stock returns: Alternative procedures for inference and measurement. Review ofFinancial Studies 5, 357–386.CrossRefGoogle Scholar
Hurvich, C.M., Simonoff, J.S. and Tsai, C.-L. (1998) Smoothing parameter selection in nonparametric regression using an improved Akaike information criterion. Journal of the Royal Statistical Society, B 60, 271–293.CrossRefGoogle Scholar
Jagannathan, R. and Kocherlakota, N.R. (1996) Why should older people invest less in stocks than younger people. Federal Reserve Bank of Minneapolis. Quaterly Review, Summer 1996. 11–20.Google Scholar
Kvålseth, T. (1985) Cautionary note about R2 . The American Statistician 39, 279–285.Google Scholar
Lund, J. and Engsted, T. (1996) GMM and present value tests of the C-CAPM: Evidence from the Danish, German, Swedish, and UK stock markets. Journal of International Money and Finance 15, 497–521.CrossRefGoogle Scholar
Müller, M. (1998) Computer-assisted Statistics Teaching in Network Environments. COMP-STAT '98 Proceedings, Bristol, UK.Google Scholar
Richardson, M. and Stock, J.H. (1989) Drawing inferences from statistics based on multi-year asset returns. Journal ofFinancial Economics 25, 323–348.CrossRefGoogle Scholar
Ruppert, D. and Wand, M.P. (1994) Multivariate locally weighted least squares regression. Annals ofStatistics 22, 1346–1370.Google Scholar
Siegel, J.J. (1998) Stocks for the long run, 2nd ed. New York: McGraw-Hill.Google Scholar
Shiller, R.J. (1981) Do stock prices move too much to be justified by subsequent changes in dividends. American Economic Review 71, 421–436.Google Scholar
Shiller, R.J. (2000) Irrational exuberrance. Princeton University Press, Princeton, New Jersey.Google Scholar
Sperlich, S. (1998) Additive Modelling and testing Model Specification. Shaker Verlag, Aachen.Google Scholar
Sperlich, S., Linton, O., and Hardle, W. (1999) Integration and backfitting methods in additive models-Finite sample properties and comparison. Test 8, 419–458.CrossRefGoogle Scholar
Wilkie, A.D. (1993) Can dividend yields predict share price changes? Transactions of the 3rd International AFIR Colloquium, Rome, 1, 335–347.Google Scholar
Wilkie, A.D. (1995) More on a stochastic asset model for actuarial use. British Actuarial Journal 5, 777–964.CrossRefGoogle Scholar
Williams, J.B. (1938) The Theory of Investment Value. Harvard University Press, Cambridge.Google Scholar