Fluctuations in the UK equity market: what drives stock returns? |
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Authors: | Dooruj Rambaccussing David Power |
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Institution: | 1. Economic Studies, School of Business, University of Dundee, Dundee, UK;2. Accounting and Finance, School of Business, University of Dundee, Dundee, UK |
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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. |
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Keywords: | state-space model UK equity market present value |
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