Must-Read: Benjamin Golez and Peter Koudijs: Four Centuries of Return Predictability

Must-Read: Benjamin Golez and Peter Koudijs: Four Centuries of Return Predictability: “We analyze aggregate market prices and dividends throughout modern financial history…

…start[ing] with the Dutch and English markets in the early 17th century and mov[ing] to the U.S. market at the end of the 19th century. We find that the dividend-to-price ratio predicts returns throughout all four centuries. “Excess volatility” is thus a pervasive feature of financial markets. The dividend-to-price ratio also predicts dividend growth rates in all but the most recent (post 1945) period. Cash-flows were therefore much more important for price movements in the past, and the dominance of discount rate news is a relatively recent phenomenon. This is consistent with the increased duration of the stock market in the recent period.