Predictability of Returns and Cash Flows

Koijen, Ralph S. J.; Nieuwerburgh, Stijn Van

doi:10.3386/w16648

Cited by 48 publications

(46 citation statements)

References 129 publications

(94 reference statements)

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“…Regarding the adjusted R 2 coefficient, it increases with the horizon and is not hump-shaped. This is driven by the increased predictive power of the dividend-price rate, dp, with the horizon and is consistent with the predictability literature summarized for example in Koijen and van Nieuwerburgh (2013).…”

Section: Long-horizon Forecastssupporting

confidence: 60%

Credit conditions and stock return predictability

Chava

Gallmeyer

Park

2015

Journal of Monetary Economics

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a b s t r a c t U.S. stock return predictability is analyzed using a measure of credit standards (Standards) derived from the Federal Reserve Board's Senior Loan Officer Opinion Survey on Bank Lending Practices. Standards is a strong predictor of stock returns at a business cycle frequency, especially in the post-1990 data period. Empirically, a tightening of Standards predicts lower future stock returns. Standards performs well both in-sample and out-ofsample and is robust to a host of consistency checks. Standards captures stock return predictability at a business cycle frequency and is driven primarily by the ability of Standards to predict cash flow news.

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Section: Long-horizon Forecastssupporting

confidence: 60%

Credit conditions and stock return predictability

Chava

Gallmeyer

Park

2015

Journal of Monetary Economics

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“…Hence, it is important for our understanding of asset pricing to also investigate how much information valuation ratios contain about the market's expectations of future cash flow growth. Our analysis focuses on forecasting dividend growth, since this quantity has been at the center of growth forecasting in the asset pricing literature (see Ball and Watts (), Campbell and Shiller (), Cochrane (), Fama and French (), Lettau and Ludvigson (), Koijen and Van Nieuwerburgh (), and Lacerda and Santa‐Clara ()).…”

Section: Resultsmentioning

confidence: 99%

“…These results show little evidence of out‐of‐sample predictability for dividend growth. However, recent research by Chen () and Koijen and Van Nieuwerburgh () documents that both return and dividend growth predictability results tend to be significantly influenced by Depression‐era observations, which are far more volatile than the rest of the CRSP sample (even more so than the 2008 to 2009 financial crisis) . When evaluating predictability with a least‐squares criterion (including OLS and PLS), it is useful to check that predictability is not being driven by a few high‐volatility observations.…”

Section: Resultsmentioning

confidence: 99%

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Market Expectations in the Cross‐Section of Present Values

Kelly¹,

Pruitt

2013

The Journal of Finance

442

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Returns and cash flow growth for the aggregate U.S. stock market are highly and robustly predictable. Using a single factor extracted from the cross-section of book-tomarket ratios, we find an out-of-sample return forecasting R 2 of 13% at the annual frequency (0.9% monthly). We document similar out-of-sample predictability for returns on value, size, momentum, and industry portfolios. We present a model linking aggregate market expectations to disaggregated valuation ratios in a latent factor system. Spreads in value portfolios' exposures to economic shocks are key to identifying predictability and are consistent with duration-based theories of the value premium.THE MOST COMMON APPROACH to measuring aggregate return and cash flow expectations is predictive regression. As suggested by the present value relationship between prices, discount rates, and future cash flows, research shows that the aggregate price-dividend ratio is among the most informative predictive variables. Typical in-sample estimates find that about 10% of annual return variation can be accounted for by forecasts based on the aggregate book-tomarket ratio, but find little or no out-of-sample predictive power.1 In this paper we show that reliance on aggregate quantities drastically understates the degree of value ratios' predictive content for both returns and cash flow growth, and hence understates the volatility of investor expectations. Our estimates suggest that as much as 13% of the out-of-sample variation in annual market returns (as much as 12% for dividend growth), and somewhat more of the insample variation, can be explained by the cross-section of past disaggregated value ratios.To harness disaggregated information we represent the cross-section of assetspecific book-to-market ratios as a dynamic latent factor model. We relate disaggregated value ratios to aggregate expected market returns and cash flow growth. Our model is based on the idea that the same dynamic state variables driving aggregate expectations also govern the dynamics of the entire panel * Kelly is with Booth School of Business, University of Chicago, and Pruitt is with the Board of Governors of the Federal Reserve System. The view expressed here are those of the authors and do not necessarily reflect the views of the Federal Reserve System or its staff.1 See Cochrane (2005) and Koijen and Van Nieuwerburgh (2011) for surveys of return and cash flow predictability evidence using the aggregate price-dividend ratio. Similar results obtain from forecasts based on the aggregate book-to-market ratio.

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“…Similarly, define expected returns on REITS by

x_{t}

x_{t} \equiv E_{t} false[r_{t + 1} false]

and assume an AR(1) for

x_{t}

following Lettau and Van Nieuwerburgh (), van Binsbergen and Koijen () and Koijen and van Nieuwerburgh ():

x_{t} = false(1 - ρ_{x} false) \bar{x} + ρ_{x} x_{t - 1} + ε_{t}^{x} .

Under this assumption, the return term in Equation can be written as a function of the current period's expected return in excess of the long‐run mean:

E_{t} [0true \sum_{j = 1}^{+ \infty} ρ^{j - 1} false(r_{t + j} - \bar{x} false)] = \frac{1}{1 - ρ ρ_{x}} false(x_{t} - \bar{x} false) .

…”

Section: Valuation Frameworkmentioning

confidence: 99%

Why are REITS Currently So Expensive?

Nieuwerburgh

2018

Real Estate Economics

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Over the last several years, the price of listed real estate stocks has been unusually high relative to dividends. I find that neither low interest rates nor low risk premia can account for the high valuation ratios. Lower interest rates have been offset by rising risk premia to keep expected returns close to average. Instead, the market has priced in future income growth on commercial properties far above the growth rates seen in the data. High implied growth rates are less extreme for nontraditional REIT sectors. Income growth expectations are also less extreme for international listed real estate.

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Predictability of Returns and Cash Flows

Cited by 48 publications

References 129 publications

Credit conditions and stock return predictability

Credit conditions and stock return predictability

Market Expectations in the Cross‐Section of Present Values

Why are REITS Currently So Expensive?

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