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Rev Fin 1992; 5:357-386
© 1992 the Society for Financial Studies

Article

Dividend yields and expected stock returns: alternative procedures for inference and measurement

RJ Hodrick
Finance Department, Kellogg Graduate School of Management, Northwestern University, Evanston, IL 60208-2006, USA

Abstract

Alternative ways of conducting inference and measurement for long-horizon forecasting are explored with an application to dividend yields as predictors of stock returns. Monte Carlo analysis indicates that the Hansen and Hodrick (1980) procedure is biased at long horizons, but the alternatives perform better. These include an estimator derived under the null hypothesis as in Richardson and Smith (1991), a reformulation of the regression as Jegadeesh (1990), and a vector autoregression (VAR) as in Campbell and Shiller (1988), Kandel and Stambaugh (1988), and Campbell (1991). The statistical properties of long-horizon statistics generated from the VAR indicate interesting patterns in expected stock returns.


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