Returns and Dividend Growth Switching Predictability

Abstract

Existing evidence shows support for both stock return and dividend growth predictability, although the time period for which such predictability occurs appears to differ. This chapter expands that line of research and considers whether there exists an explicit relation between periods of stock return and dividend growth predictability. Using predictive regressions, a VAR model and a quantile approach, the results support a positive relation in the strength of the predictive coefficient. As the coefficients have opposite signs, this implies a strengthening of stock return predictability is consistent with a weakening of dividend growth predictability, with the reverse equally true. Hence, these results provide formal evidence that the two types of predictability vary over time and in a switching manner.