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Citation

McMillan D (2014) Stock Return, Dividend Growth and Consumption Growth Predictability Across Markets and Time: Implications for stock price movement. International Review of Financial Analysis, 35, pp. 90-101. https://doi.org/10.1016/j.irfa.2014.07.011

Abstract
This paper links variation in the predictive regressions for stock returns, dividend growth and consumption growth to economic and market factors. The nature of these links can reveal whether movement in asset prices occurs primarily through the discount rate or cash flow channel, while they also help explain the reported mixed results for predictability. Variation is examined through cross-sectional regressions across 15 markets and over time using rolling regressions. The cross-sectional and time-varying parameters are regressed against output growth, interest rates and inflation as well as market variables using fixed effects panel as well as both OLS and logit approaches. The key implication for asset pricing is that although movement occurs through both channels, stock return predictability is more dominated by the discount rate channel and consumption growth predictability more so by the cash flow channel. Intuitively, such a difference may arise as investors and households rebalance their asset holdings and consumption at different speeds. There is also some evidence of money illusion through the inflation variable.

Keywords
Stock returns; Dividend growth; Consumption growth; Predictability; Discount rates; Cash flow

Journal
International Review of Financial Analysis: Volume 35