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RFS Advance Access published online on July 6, 2006
Review of Financial Studies, doi:10.1093/rfs/hhl021
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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

Article

Stock Return Predictability: Is it There?

Andrew Ang 1 * and Geert Bekaert 1
1 Columbia Business School, 802 Uris Hall, 3022 Broadway, New York

* To whom correspondence should be addressed.
Andrew Ang, E-mail: aa610{at}columbia.edu


  Abstract

We examine the predictive power of 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 cashflows.


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