Review of Managerial Science

, Volume 7, Issue 2, pp 159–189 | Cite as

Return predictability and social dynamics

  • Richard Hule
  • Jochen LawrenzEmail author
Review paper


The ability to predict stock returns from financial ratios is a long-standing but still controversial topic. There is ongoing debate about the empirical evidence as well as about appropriate theoretical explanations. We provide evidence from a simulated economy that local, social interaction among agents is remarkably successful in matching several established empirical facts. We find significant return predictability at various forecast horizons, absence of dividend growth predictability, high persistence in dividend yields, and absence of significant return autocorrelations. Our results suggest that social dynamics are a simple, intuitively appealing and successful way to explain predictability.


Return predictability Predictive regressions Social dynamics Hidden Markov Chain Agent-based models 

JEL Classification

G17 G12 D80 E37 



We thank Matthias Bank, Christian Flor, Arie Gozluklu, Jörn van Halteren, Stefan Hirth, Wolfgang Kürsten (the editor), Maik Schmeling, Lorne Switzer, Martin Wallmeier, an anonymous referee that provided a very detailed and helpful report, and seminar participants at the German Finance Association Annual Meeting 2010 Hamburg, the European Financial Management Association Annual Meeting 2010 Aarhus, the Financial Management Association European Annual Meeting 2010 Hamburg, and the Financial Management Association Annual Meeting 2010 New York. As always, all remaining errors are our own.


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Copyright information

© Springer-Verlag Berlin Heidelberg 2013

Authors and Affiliations

  1. 1.Department of EconomicsInnsbruck UniversityInnsbruckAustria
  2. 2.Department of Banking and FinanceInnsbruck UniversityInnsbruckAustria

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