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Miller and Modigliani, Predictive Return Regressions and Cointegration *
Author(s) -
Alessandri Piergiorgio,
Robertson Donald,
Wright Stephen
Publication year - 2008
Publication title -
oxford bulletin of economics and statistics
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.131
H-Index - 73
eISSN - 1468-0084
pISSN - 0305-9049
DOI - 10.1111/j.1468-0084.2007.00499.x
Subject(s) - predictive power , economics , econometrics , cointegration , dividend yield , dividend , cash flow , vector autoregression , stock (firearms) , financial economics , dividend policy , finance , philosophy , epistemology , mechanical engineering , engineering
This paper investigates the use of alternative measures of dividend yields to predict US aggregate stock returns. Following Miller and Modigliani [ Journal of Business (1961), Vol. 34, pp. 411–433] we construct a cashflow yield that includes both dividend and non‐dividend cashflows to shareholders. Using a data set covering the course of the 20th century, we show in a cointegrating vector autoregression framework that this measure has strong and stable predictive power for returns. The weak predictive power of standard measures of the dividend yield is explained by the strong rejection of the implied cointegrating and causality restrictions on the impact of non‐dividend cashflows.