Are Stock Returns Predictable? Rewarding Patient Investors & Powerful Binding Equilibriums

Abstract

Stock markets worldwide have rewarded patient investors, hence the common advice to ‘buy and hold’. Yet even with a large body of research over a prolonged period, proving this concept remains an onerous exercise for academics. We use Tobin’s Q and the dividend yield to build an equilibrium relationship for the US aggregate stock market using 119 years of data. The resulting VECM model supports practitioners making long-horizon predictions and provides powerful forecasting ability. Our work is directly applicable to UK price controls.