TY - JOUR
T1 - Stock return and cash flow predictability
T2 - The role of volatility risk
AU - Bollerslev, Tim
AU - Xu, Lai
AU - Zhou, Hao
N1 - Funding Information:
We would like to thank Michael McAleer (the Editor), two anonymous referees, Andrew Patton, George Tauchen and seminar participants at the Duke Financial Econometrics Lunch Group and the July 2013 China International Conference in Finance for their helpful comments. Bollerslev’s research was supported by a grant from the National Science Foundation ( SES-0957330 ) to the NBER, and CREATES ( DNRF78 ) funded by the Danish National Research Foundation .
Publisher Copyright:
© 2015 Elsevier B.V.
PY - 2015/8/1
Y1 - 2015/8/1
N2 - We examine the joint predictability of return and cash flow within a present value framework, by imposing the implications from a long-run risk model that allow for both time-varying volatility and volatility uncertainty. We provide new evidence that the expected return variation and the variance risk premium positively forecast both short-horizon returns and dividend growth rates. We also confirm that dividend yield positively forecasts long-horizon returns, but that it does not help in forecasting dividend growth rates. Our equilibrium-based "structural" factor GARCH model permits much more accurate inference than univariate regression procedures traditionally employed in the literature. The model also allows for the direct estimation of the underlying economic mechanisms, including a new volatility leverage effect, the persistence of the latent long-run growth component and the two latent volatility factors, as well as the contemporaneous impacts of the underlying "structural" shocks.
AB - We examine the joint predictability of return and cash flow within a present value framework, by imposing the implications from a long-run risk model that allow for both time-varying volatility and volatility uncertainty. We provide new evidence that the expected return variation and the variance risk premium positively forecast both short-horizon returns and dividend growth rates. We also confirm that dividend yield positively forecasts long-horizon returns, but that it does not help in forecasting dividend growth rates. Our equilibrium-based "structural" factor GARCH model permits much more accurate inference than univariate regression procedures traditionally employed in the literature. The model also allows for the direct estimation of the underlying economic mechanisms, including a new volatility leverage effect, the persistence of the latent long-run growth component and the two latent volatility factors, as well as the contemporaneous impacts of the underlying "structural" shocks.
KW - Equilibrium pricing
KW - Return and dividend growth predictability
KW - Stochastic volatility and uncertainty
KW - Structural factor GARCH
KW - Variance risk premium
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U2 - 10.1016/j.jeconom.2015.02.031
DO - 10.1016/j.jeconom.2015.02.031
M3 - Article
AN - SCOPUS:84945440884
SN - 0304-4076
VL - 187
SP - 458
EP - 471
JO - Journal of Econometrics
JF - Journal of Econometrics
IS - 2
ER -