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Nonlilearity in Valuation Ratio and Its Implications on Long-Horizon Stock Return Predictability

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Abstract

We find that the log of real price-dividend ratios from 1872 to 2001 can be described as a logistic smooth transition autoregression model. The estimation shows that the series is in a regime where this process shows nonstationarity for most of the period after 1959. Some earlier studies which report highly predictable stock returns only after WWII and the excessive bias from 1970s to late 1990s in the coefficient of the forecasting variable can be explained using regime switching behavior, i.e. nonstationary behavior of the forecasting variable in the stock return prediction regression in the latter part of the sample.

참고문헌 (42)

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