150 Years of Return Predictability Around the World: A Holistic View

TL;DR

This study analyzes 150 years of data across 16 developed countries to assess return predictability using payout-price ratios, finding minimal consistent predictive power and limited economic gains for investors.

Contribution

It provides a comprehensive, multi-country, multi-asset analysis showing that payout-price ratios have limited predictive power for returns and wealth, challenging prior assumptions.

Findings

Few countries show positive economic gains from payout ratio-based predictions.

Return predictability is weak for representative agents' portfolios.

VAR analysis indicates limited predictability of payout growth across countries.

Abstract

Using new annual data of 16 developed countries across bond, equity, and housing markets, I study the return predictability using the payout-price ratios, i.e., coupon price, dividend price, and rent price. None of the 48 country-asset combinations shows consistent in-sample and out-of-sample performance with positive utility gain for the mean-variance investor. Only 3 (4/2) countries show positive economic gains in their equity (housing/bond) markets. The return predictability for the representative agents' risky asset portfolios and wealth portfolios is even weaker, suggesting that timing the investment return of a country using payout-price ratios will not make the investors better off. The predictive regressions based on the VAR analysis by Cochrane (2008, 2011) suggest that 14 (5) countries have predictable payout growth in the equity (housing) markets, ex., the dividend price predicts the dividend growth in the US. The VAR simulation using data from all the countries does not reject the null that the dividend growth is predictable. This paper presents firm evidence against the return predictability based on payout ratios.