Stock return and cash flow predictability: The role of volatility risk
Tim Bollerslev,
Lai Xu and
Hao Zhou
Journal of Econometrics, 2015, vol. 187, issue 2, 458-471
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.
Keywords: Return and dividend growth predictability; Variance risk premium; Equilibrium pricing; Stochastic volatility and uncertainty; ‘‘Structural” factor GARCH (search for similar items in EconPapers)
JEL-codes: C12 C13 G12 G13 (search for similar items in EconPapers)
Date: 2015
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Citations: View citations in EconPapers (22)
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Working Paper: Stock Return and Cash Flow Predictability: The Role of Volatility Risk (2012) 
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Persistent link: https://EconPapers.repec.org/RePEc:eee:econom:v:187:y:2015:i:2:p:458-471
DOI: 10.1016/j.jeconom.2015.02.031
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