Korean Journal of Policy Studies

Graduate School of Public Administration, Seoul National University

Korean J. Policy Stud. 2016; 31(2):71-81

pISSN: 1225-5017, eISSN: 2765-2807

Article

Reconciling the Return Predictability Evidence under Structural Breaks

Cheolbeom Park¹

¹Cheolbeom Park is a professor in the Department of Economics at Korea University, Seoul. E-mail: cbpark_kjs@kiorea.ac.kr. I am grateful to anonymous referees for helpful comments. The usual disclaimers apply.

Â© Copyright 2016 Graduate School of Public Administration, Seoul National University. This is an Open-Access article distributed under the terms of the Creative Commons Attribution Non-Commercial License (http://creativecommons.org/licenses/by-nc/4.0/) which permits unrestricted non-commercial use, distribution, and reproduction in any medium, provided the original work is properly cited.

Received: Jun 24, 2016; Revised: Jul 08, 2016; Revised: Aug 12, 2016; Accepted: Aug 13, 2016

Published Online: Aug 31, 2016

Abstract

This study shows that the poor out-of-sample performance of the realtime adjusted dividend-price ratio reported in Lettau and Nieuwerburgh (2008) is mainly a result of the gap period between the occurrence of a break and its detection, which implies that the poor out-of-sample performance of the adjusted dividend-price ratio is due to the requirement in Bai and Perron’s (1998) procedure that breaks must be away from the boundaries of the sample. A substantial improvement in the out-of-sample performance of the adjusted dividend-price ratio during the gap period is shown with the use of Andrews’s (2003) procedure in the real-time adjustment of the dividend-price ratio. The newly suggested procedure for the adjusted dividend-price ratio in this study has better out-ofsample performance than the simple sample mean, although it is not significant.

Keywords: stock-return predictability; structural break; out-of-sample forecast