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Title: Testing return predictability with the dividend-growth equation: An anatomy of the dog Authors:  Erik Hjalmarsson - University of Gothenburg (Sweden) [presenting]
Tamas Kiss - University of Gothenburg (Sweden)
Abstract: The dividend-growth based test of return predictability is similar to a likelihood-based test of the standard return-predictability model, treating the autoregressive parameter of the dividend-price ratio as known. In comparison to standard OLS-based inference, both tests achieve power gains from a strong use of the exact value postulated for the autoregressive parameter. When compared to the likelihood-based test, there are no power advantages for the dividend-growth based test. In common implementations, with the autoregressive parameter set equal to the corresponding OLS estimate, Cochrane's test also suffers from severe size distortions.