Working paper No. 60
By Francis Breedon, Marco Bianchi and Darren Sharma
This paper extends US evidence on the ability of current dividend yields to predict future equity returns to the G5. Also, using non-parametric methods, we find evidence of a similar non-linear structure in all the countries analysed. This casts doubt on the linear framework adopted in earlier studies. Our tests find that there is a strong relationship between extremes of dividends and future returns (ie very low/high dividends do predict low/high returns whilst intermediate levels of dividends do not). This non-linear structure strengthens the statistical evidence of a relationship between dividend yields and future returns and may help explain why previous studies have found mixed evidence.
Testing the predictive power of dividend yields: non-parametric evidence from the G5