Stock Return Predictability: Is it There?

We ask whether stock returns in France, Germany, Japan, the UK and the US are predictable by three instruments: the dividend yield, the earnings yield and the short rate. The predictability regression is suggested by a present value model with earnings growth, payout ratios and the short rate as state variables. We find the short rate to be the only robust short-run predictor of excess returns, and find little evidence of excess return predictability by earnings or dividend yields across all countries. There is no evidence of long-horizon return predictability once we account for finite sample influence. Cross-country predictability is stronger than predictability using local instruments. Finally, dividend and earnings yields predict future cashflow growth rates both in the US and in other countries.