Asymptotic tests over-reject the null of no predictability in present-value models. We develop a nonparametric testing approach in state space models, implying reliable finite sample inference under weak assumptions on price-dividend ratio and dividend shocks. We find sharp evidence of return...

Asymptotic tests over-reject the null of no predictability in present-value models. We develop a nonparametric testing approach in state space models, implying reliable finite sample inference under weak assumptions on price-dividend ratio and dividend shocks. We find sharp evidence of return...

Using a latent variables approach, we estimate the dynamics of dividends and returns in a tractable present-value model with time-varying risks. Expected returns imply a similar return predictability as under homoskedasticity, while expected dividend growth is more persistent and explains a...

Conventional tests of present-value models over-reject the null of no predictability. In order to better account for the intrinsic probability of detecting predictive relations by chance alone, we develop a new nonparametric Monte Carlo testing method, which does not rely on distributional...