Econometric Models of Company Dividends Can Be Used to Identify Underpriced Shares

Abstract

The authors estimate a price-conditional vector autoregression for individual company dividends and this is used to forecast future dividends. Stocks are then ranked by the ratio of their current price relative to future dividend forecasts. This ranking is shown to forecast returns, using cross-section return regressions, even after controlling for conventional measures of risk. Copyright 1995 by Blackwell Publishers Ltd and The Victoria University of Manchester