Fluctuations in the UK equity market: what drives stock returns?. Issue 6 (13th April 2018)

• Record Type: Journal Article
• Authors: Rambaccussing, Dooruj; Power, David
• Is Part Of: European journal of finance. Volume 24:Issue 6(2018)
• Page Start: 499
• Page End: 516
• Publication Date: 2018-04-13
• Subjects: state-space model -- UK equity market -- present value; G12 -- C32 -- C58; Finance -- Periodicals; Finance -- Europe -- Periodicals; International finance -- Periodicals; 332.094
• DOI: 10.1080/1351847X.2017.1335649
• Languages: English
• ISSNs: 1351-847X

Abstract

ABSTRACT: Present value parameters from a state-space model are estimated for the UK FT All-Share Index. The estimated parameters are used to construct a time series of expected future returns and expected future values of dividend growth, both of which are found to be time-varying with persistent components. Variations in the price-dividend ratio appear to be driven primarily by the variance in expected returns. A comparison with the findings from a present value-constrained vector autoregression model indicates that the latter forecasts future realized returns and dividend growth better than the series constructed using a state-space approach. Furthermore, when the model is estimated for monthly and quarterly data, expected dividend growth is found to be more persistent.