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Dividend Growth Does Not Help Predict Returns Compared To Likelihood-Based Tests: An Anatomy of the Dog
Department of Economics and the Centre for Finance, University of Gothenburg, Gothenburg, Sweden.
Örebro University, Örebro University School of Business.ORCID iD: 0000-0001-8124-328x
2021 (English)In: Critical Finance Review, ISSN 2164-5744, Vol. 10, no 3, p. 445-464Article in journal (Refereed) Published
Abstract [en]

The dividend-growth based test of return predictability, proposed by Cochrane (2008), is similar to a likelihood-based test of the standard return-predictability model, treating the autoregressive (AR) parameter of the dividend-price ratio as known. In comparison to standard OLS-based inference, both tests can achieve power gains by using restrictions or prior information on the value of the AR parameter. When compared to the likelihood-based test, there are no power advantages for the dividend-growth based test. In common implementations, with the AR parameter set equal to the corresponding OLS estimate, Cochrane's test suffers from severe size distortions.

Place, publisher, year, edition, pages
Now Publishers Inc., 2021. Vol. 10, no 3, p. 445-464
Keywords [en]
Predictive regressions, Present-value relationship, Stock-return predictability
National Category
Economics
Identifiers
URN: urn:nbn:se:oru:diva-93778DOI: 10.1561/104.00000105ISI: 000680826000001Scopus ID: 2-s2.0-85112081446OAI: oai:DiVA.org:oru-93778DiVA, id: diva2:1586148
Note

Funding Agency:

Nasdaq Nordic Foundation

Available from: 2021-08-19 Created: 2021-08-19 Last updated: 2021-08-19Bibliographically approved

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Kiss, Tamás

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