Stock Return and Cash Flow Predictability: The Role of Volatility Risk

Tim Bollerslev, Lai Xu () and Hao Zhou
Additional contact information
Lai Xu: Duke University, Postal: Department of Economics, Durham NC 27708, USA

CREATES Research Papers from Department of Economics and Business Economics, Aarhus University

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 cannot forecast dividend growth rates. Our equilibrium-based “structural” factor GARCH model permits much more accurate inference than the reduced form VAR and 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; expected variation; long-run risk; equilibrium pricing; stochastic volatility and uncertainty; reduced form VAR; “structural” factor GARCH (search for similar items in EconPapers)
JEL-codes: C12 C13 G12 G13 (search for similar items in EconPapers)
Pages: 60
Date: 2012-11-16
New Economics Papers: this item is included in nep-fdg, nep-fmk, nep-for and nep-ore
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

Downloads: (external link)
https://repec.econ.au.dk/repec/creates/rp/12/rp12_51.pdf (application/pdf)

Related works:
Journal Article: Stock return and cash flow predictability: The role of volatility risk (2015)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:aah:create:2012-51

Access Statistics for this paper

More papers in CREATES Research Papers from Department of Economics and Business Economics, Aarhus University
Bibliographic data for series maintained by ().