Subsampling Stock Returns

Abstract

There has been considerable debate in the recent finance literature over whether stock returns are predictable. A number of studies appear to provide empirical support for the use of the current dividend-price ratio, or dividend yield, as a measure of expected stock returns (see, for example, Rozeff, 1984; Campbell and Shiller, 1988b; Fama and French, 1988; Hodrick, 1992; and Nelson and Kim, 1993). The problem with such studies is that stock return regressions face several kinds of statistical problems, among them strong dependency structures and biases in the estimation of regression coefficients. These problems tend to make findings against the no predictability hypothesis appear more significant than they really are. Having recognized this, Goetzmann and Jorion (1993) argue that previous findings might be spurious and are largely due to the poor small sample performance of commonly used inference methods. They employ a bootstrap approach and conclude that there is no strong evidence indicating that dividend yields can be used to forecast stock returns. One should note, however, that their special approach is not shown to be backed up by theoretical properties. Also, it requires a lot of custom-tailoring to the specific situation at hand. For other scenarios, a different tailoring would be needed.