This relation between return and yield is robust to various specifications of multifactor asset pricing models that incorporate the fama french factors. Dividend yields, dividend growth, and return predictability in the cross section of stocks paulo maio and pedro santaclara. I shall now describe the stock return problem in a formal. Growth expectations, dividend yields, and future stock returns zhi day, ravi jagannathan z, and jianfeng shen x february 22, 2015 abstract according to the present value relation, the longrun expected return on stocks, stock yield, is the sum of the dividendtoprice ratio and a particular weighted average of expected future dividend growth rates.
Dividend yields and expected stock returns columbia business. Consequently, it is my first methodology, and i use the fama and french. The power of dividend yields to forecast stock returns, measured by regression. It provides an analysis of predictable components of monthly common stock returns. Fama and french 1988 show that stock returns can be predicted by dividend yields. Dividend yields for forecasting stock market returns. Specifically, it examines the existence of longrun and shortrun relationship and also their predictive power causality between and among market stock return, dividend yieds and price earnings. All nyse, amex, and nasdaq stocks for which we have me for june of year t, and at least 7 monthly returns to compute the dividend yield from july of t1. Growth expectations, dividend yields, and future stock returns zhi day, ravi jagannathan z, and jianfeng shen x february 22, 2015 abstract according to the present value relation, the longrun expected return on stocks, stock yield, is the sum of the dividend toprice ratio and a particular weighted average of expected future dividend growth rates. Valuation theory says that expected stock returns are related to three variables. French abstract two easily measured variables, size and booktomarket equity, combine to capture the crosssectional variation in average stock returns associated with market 3, size, leverage, booktomarket equity, and earningsprice ratios. Dividend yields, dividend growth, and return predictability. In this note, we explore alternative specifications of the value hml and size smb factors using pricetoearnings, pricetocash flow, and dividend yield. Using an improved measure of a common stocks annualized dividend yield, we document that risk.
Business cycles and the behavior of metals prices, journal of finance december 1988, with eugene fama. I follow campbell and shiller 1989 and generate artificial data from simulations of the var. In contrast to the aggregatelevel findings, earnings yield has significant explanatory power for the timeseries and crosssectional variation in firmlevel stock returns and the 48 industry portfolio returns. The relationship between returns and dividend yield is also documented in a study conducted by naranjo. This relation between return and yield is robust to various specifications of multifactor asset pricing models that incorporate the famafrench factors. Respecifying the fama french 3factor model flirting with. As to the expected effects from risk factors, fama and french 1993. In their classic assessment of the predictability of excess stock returns, fama and french 1989 find that excess returns are indeed predictable, with most predictive power coming from the dividend yield, the default premium, and the term premium. See, for example, rozeff 1984, campbell and shiller 1988a, fama and 1. Monte carlo experiments require a datagenerating process that provides. Multivariate causal estimates of dividend yields, price. When expected dividend growth rates vary over time, according to the present value relationship, we show that stock yield, that is, the longrun expected return on stocks, is the current dividend yield plus a weighted average of expected future oneperiod dividend growth rates. Growth expectations, dividend yields, and future stock returns.
Dividend yields and expected stock returns semantic scholar. Today, many financial economists believe that the time variability in expected returns is the dominant component of market price variability. View citations in econpapers 1031 track citations by rss feed. Dividend yields and expected stock returns sciencedirect.
Dividend dynamics, learning, and expected stock index returns. Business conditions and expected returns on stocks. French journal of financial economics 82 2006 491518 493. Experience from malaysia abstract the study examines the relationship among malaysians market stock return, dividend yields and price earnings rat o. An ardl cointegration analysis for germany, ekonomia, cyprus economic society and university of cyprus, vol. The study examines the relationship among malaysians market stock return, dividend yields and price earnings rato. This paper studies the predictability of returns in the french stock market. Portfolios of stocks with a low dividend yield respond stronger to the returns of the. Fama and french 1988 report that the power of dividend yields. These funds offer a diversified basket of high yielding stock holdings.
Expected stock returns and variance risk premia, creates research papers 200717, department of economics and business economics, aarhus. The cumulative price effect of these shocks is roughly zero. Specifically, it examines the existence of longrun and shortrun relationship and also. Introduction rationalitybased assetpricing models assert that the crosssection of expected stock returns can be explained by betas or factor loadings on a set of common factors. All nyse, amex, and nasdaq stocks for which we have me for june of year t, and at least 7 monthly returns to compute the dividend yield from july of t1 to june of t. Stock returns, dividend yields, and taxes naranjo 1998. Asset pricing and predictability of stock returns in the. This cited by count includes citations to the following articles in scholar. Similar results are found from stock returns and pe ratio to dividend yield, as well as from dividend yied and stock returns to pe raton but with lesser magnitude.
Cochrane, 1992 is that aggregate dividend yields strongly predict excess returns, and the predictability is stronger at longer horizons. Yield curves typically slope up, with long maturity bonds promising higher returns government than short maturity bonds. Dividend yields, dividend growth, and return predictability in the cross section of stocks volume 50 issue 12 paulo maio, pedro santaclara skip to main content accessibility help we use cookies to distinguish you from other users and to provide you with a better experience on our websites. Expected stock returns and variance risk premia, finance and economics discussion series 200711, board of governors of the federal reserve system u. Northholland dividend yie2ds and expecied stkx returns eugene f fama and kenneth r. Average returns, dividend yields, and concentration in 2012, 39% of firms, representing 17% of aggregate global market cap, did not pay dividends. Fama and french 1988 examine the ability of dividend yields to predict stock returns they find that the degree of forecasting stock returns by dividend yield increases with return horizon. Stock yield also predicts future stock index returns in the us and other g7 countries and returns of us stock portfolios formed by sorting stocks based on firm characteristics, at various horizons. Inverted yield curves and expected stock returns inverted yield curves and expected stock returns. In the dynamic case, stock yield is an a ne function of the dividend yield and a weighted average of expected future growth rates in dividends. In this case, dividend yields and expected returns are high when prices are temporarily irrationally low and vice versa. Abstract the power of dividend yields to forecast stock returns, measured by regression r2, increases with the return horizon. French unioersity of chicago, chicago,il 60637, usa pccived august 198, final version received march 1988 the power of dividend yields to fol.
Dividend yields and stock returns implications of abnormal january returns donald b. Multivariate causal estimates of dividend yields, price earning ratio and expected stock returns. Alternative procedures for inference and measurement. The remaining variablesdividend yield, longterm returns, 12month stock issuance, and market leverageare not significant for any group of stocks, with tstatistics ranging from 1. Monte carlo analysis indicates that the hansen and hodrick 1980 procedure is biased at long horizons, but the alternatives perform better. Much empirical evidence says the slope of the yield curve predicts economic. The empirical results suggest that the eightfactor model that includes all above fundamentals can better explain the variations of stock returns than the original fama french threefactor model. Whereas black and scholes 1973 find no difference in expected returns of high yield and low yield stocks, 121 fama and french 1988 point out that regressions of returns related to dividend yields have an explanatory power, in particular, when considering longer return horizons. Aggregate earnings, firmlevel earnings, and expected stock. In comparison, stock yields, computed assuming that expected dividend growth rates are constant, explain only 10.
Contrary to lamont 1998, we find that neither dividend payout ratio nor the level of aggregate earnings can forecast the excess market return. As we will see later in this paper, this finding has been contested in more recent papers. Dividend yields and expected stock returns, journal of financial economics october 1988, with eugene fama. The crosssection of expected stock returns eugene f. Respecifying the fama french 3factor model flirting. Size and booktomarket factors in earnings and returns. We use yields based on annual dividends to avoid seasonals in dividends. The third methodology recognizes that longhorizon linear pre. We show that this pattern, although valid for the stock market as a whole, is not true for small and value stocks portfolios where dividend yields are related mainly to future dividend changes. We test the hypothesis that inverted yield curves predict negative equity premiums. Our primary objective is to determine whether nonrisk characteristics have marginal explanatory power relative to the arbitrage pricing theory benchmark, with factors. Dividend yields and expected stock returns econpapers. Keim university of pennsylvania, philadelphia, pa i91 04 usa received january 1983, final version received march 1985 this study examines the empirical relation between stock returns and longrun dividend yields. Fama and french 1988, fama and french 1989, hodrick 1992.
Evidence that dividend yields forecast stock returns is in rozeff 1984 shiller 1984 flood, hodrick. Hodrick 1992 reports that changes in dividend yields significantly forecast expected stock returns. Dividend yields, stock returns, and reputation global business. The power of dividend yields to forecast stock returns, measured by regression r 2, increases with the return horizon. Hodrick 1992 reports that changes in dividend yields. Alternative ways of conducting inference and measurement for longhorizon forecasting are explored with an application to dividend yields as predictors of stock returns. Fama and french 1988, fama and french 1989, hodrick 1992, campbell and shiller 2001 find that the dividend yield or dividend price ratio have predictive power for u. Aggregate earnings, firmlevel earnings, and expected.
This paper provides an analysis of the predictability of stock returns using market, industry, and firmlevel earnings. Morirer, because pt 1 can only reflect information 8 e f. French multifactor explanations of asset pricing anomalies 450 eugene f. We show that, between 1976 and 20, these stock yields explain 15. The ability of the dividend yield to predict excess returns is best visible at short horizons with the short rate as an additional regressor.
Predicting dividends in loglinear present value models. Abstract there is a generalized conviction that variation in dividend yields is exclusively related to expected returns and not to expected dividend growth, for example, cochranes 2011 presidential address. To avoid inducing serial correlation when forecasting quarterly and annual returns, fama and french sample the data and use the traditional ols standard errors. Abstract the power of dividend yields to forecast stock returns, measured by regression r2. Dec 16, 2019 this post is available as a pdf download here. Jun 27, 2007 alternative ways of conducting inference and measurement for longhorizon forecasting are explored with an application to dividend yields as predictors of stock returns. Foreign stocks now provide higher dividend yields than their u. Macbeth the crosssection of expected stock returns 349 eugene f. May 19, 2015 monte carlo experiments require a datagenerating process that provides artificial stock returns, dividend yields, and treasurybill returns whose timeseries properties are consistent with those of the actual data. Understanding the controversy over dividendbased investing. Campbell and shiller 1988a, b, fama and french 1988, 1989, and many others showed that aggregate dividend yields predict aggregate stock returns, but not aggregate dividends.
Fama and french, size, book to market, crosssectional stock returns, least trimmed squares jel classification. Summary the fama french threefactor model provides a powerful tool for assessing exposures to equity risk premia in investment strategies. Dividend yields and stock returns implications of abnormal. Background and definitions french 1988, hodrick 1992, and nelson and kim 1993. The mean reversion of stock prices as well as the earnings correlation with expected stock returns are responsible for the forecasting. We find also that the expected excess returns on small. Dividend yields and expected stock returns pdf free download.
The findings are consistent with a single dominant factor driving expected returns on stocks over different holding periods. Apr 15, 2017 3 attractive french adr dividend stocks. Wp find that estimated shocks to expected returns e f fama and k. Capm and fama and french 1993 threefactor model do not provide. Citations of dividend yields and expected stock returns. Pdf alternative ways of conducting inference and measurement for. French common risk factors in the returns on stocks and bonds 392 eugene f. Bm, profitability, investment, momentum, pe, and dividend yields factors for each market. French dividend yields and expected stock returns table 1 crosscorrelations between oneyear continuously compounded returns and current and future oneyear changes in the log of annual dividends for the crsp valueweighted and equalweighted nyse portfolios. Abstract we examine the relation between stock returns, measures of risk, and several nonrisk security characteristics, including the booktomarket ratio, firm size, the stock price, the dividend yield, and lagged returns.
Fama and kenneth french journal of financial economics, 1988, vol. With the publication of the 1992 paper the crosssection of expected stock returns by eugene fama and kenneth french, the capm was replaced by the fama french threefactor model, which added. Dividend yield represents just over half of the total return from u. We study a singlebeta conditional model and we show that stock market risk premium is variable over the time and is important for capturing predictable variations of stock returns. These annual yields are used to forecast the returns.
Watch out for dividend traps, however, because stocks having a dividend yield of 10% and above are usually very risky investments. Monte carlo analysis indicates that the hansen and hodrick 1980 procedure is. At short horizons, the short rate strongly negatively predicts excess returns, while at long horizons, the predictive power of the dividend yield is weak. The reaction of expected stock returns to dividend shocks are to predict the dynamic relationship between. The dividend yield use to form portfolios in june of year t is the total dividends paid from july of t1 to june of t per dollar of equity in june of t.
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