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RFS Advance Access originally published online on July 6, 2006
Review of Financial Studies 2007 20(3):651-707; doi:10.1093/rfs/hhl021
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Right arrow C12 - Hypothesis Testing
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© The Author 2006. Published by Oxford University Press on behalf of The Society for Financial Studies. All rights reserved. For permissions, please email: journals.permissions@oxfordjournals.org.

Stock Return Predictability: Is it There?

Andrew Ang
Columbia University and NBER

Geert Bekaert
Columbia University, NBER and CPER

Address correspondence to Geert Bekaert, Columbia Business school, Room 802, Uris Hall, 3022 Broadway, New York, NY 10027, or e-mail: gb241{at}columbia.edu.

We examine the predictive power of the dividend yields for forecasting excess returns, cash flows, and interest rates. Dividend yields predict excess returns only at short horizons together with the short rate and do not have any long-horizon predictive power. At short horizons, the short rate strongly negatively predicts returns. These results are robust in international data and are not due to lack of power. A present value model that matches the data shows that discount rate and short rate movements play a large role in explaining the variation in dividend yields. Finally, we find that earnings yields significantly predict future cash flows. (JEL C12, C51, C52, E49, F30, G12)


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