“Four centuries of return predictability” by Benjamin Golez
University of Notre Dame
Using the Dutch, English and U.S. stock markets, we provide evidence for return predictability across four centuries. Most of the predictability stems from recessions. In downturns, the dividend-to-price ratio increases and predicts higher returns going forward, both over annual and multi-annual horizons. For the period as a whole, dividend growth rates are also predictable, but in the recent U.S. period return predictability dominates. We hypothesize that this is the result of firms retaining more earnings for investment, which extended the duration of the stock market as a whole and increased the importance of (persistent) discount rate shocks.