Stock return and cash flow predictability: The role of volatility risk

Tim Bollerslev, Lai Xu, Hao Zhou

Research output: Contribution to journalArticle

12 Scopus citations

Abstract

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.

Original languageEnglish (US)
Pages (from-to)458-471
Number of pages14
JournalJournal of Econometrics
Volume187
Issue number2
DOIs
StatePublished - Aug 1 2015

Keywords

  • Equilibrium pricing
  • Return and dividend growth predictability
  • Stochastic volatility and uncertainty
  • Structural factor GARCH
  • Variance risk premium

ASJC Scopus subject areas

  • Economics and Econometrics

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