The Predictability of Returns with Regime Shifts in Consumption and Dividend Growth
Speaker
Abstract
| We present evidence that the stock market return, dividend growth, and consumption growth are predictable. The key insight is that the consumption and dividend growth processes differ across two latent economic regimes. We estimate the equilibrium model and identify the probability that the economy is in the first regime as a non-linear function of the risk free rate and market-wide price-dividend ratio. The second regime is associated with recessions, market downturns, and higher volatility of returns and growth rates. The model-implied state variables perform significantly better at in-sample forecasting and out-of-sample prediction of the equity, size, and value premia and consumption and dividend growth rates than the price-dividend ratio and risk free rate. |
| Contact information: |
| Elvira Sojli |
