- Title
- Predictive power of dividend yields and interest rates for stock returns in South Asia: evidence from a bias-corrected estimator
- Creator
- Rahman, Md Lutfur; Shamsuddin, Abul; Lee, Doowon
- Relation
- International Review of Economics and Finance Vol. 62, Issue July 2019, p. 267-286
- Publisher Link
- http://dx.doi.org/10.1016/j.iref.2019.04.010
- Publisher
- Elsevier
- Resource Type
- journal article
- Date
- 2019
- Description
- Predictive models of stock returns are often criticized for generating spurious predictability, unstable predictive relationship, and poor out-of-sample forecasting performance. This paper addresses these issues in the context of four major South Asian equity markets. We provide a bias-corrected estimate of the relationship of future stock returns to dividend yield and interest rate. We use a restricted vector autoregressive model, draw statistical inferences from a wild-bootstrap method with superior size and power properties, and allow model parameters to vary over time. Dividend yield is a significant predictor in both in- and out-of-sample (OOS)in two countries, while interest rate exhibits significant predictability in all four markets. Imposing theoretically motivated restrictions on model parameters appears to improve OOS predictability. Finally, time-variation in return predictability is found to be linked to countercyclical risk premium and persistence of the predictor variables.
- Subject
- return predictability; excess returns; dividend yield; interest rate; time-variation; South Asia
- Identifier
- http://hdl.handle.net/1959.13/1471324
- Identifier
- uon:48648
- Identifier
- ISSN:1059-0560
- Language
- eng
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