Essay: Dividend yield
Attempts have been made to predict using economic and financial variables and encompassing dividend yields and term spreads but to little avail. Dividend yield is seen as a good indicator of stock returns along with book to market and price-earnings ratios. Anyhow, the literature review here is a good step towards aiding data snooping efforts, particularly in exploring some variables such as the Westpac indices which have not been employed before.
Having some basis for the theory that is present and the one employed here, the data used and methodology assumes considerable importance to assess the impact of any study. The study here uses sources such as the value-weighted Australian All Ordinaries Index, the Reserve Bank of Australia for interest rates and valuation ratios from MSCI from 1974 to June 2007. This indicates easy availability and hence verification through use of these variables subsequently. The investigation of economic significance of return predictability is done using a dynamic portfolio-switching strategy. Although previous research has employed the OLS method, this research favors the probit model, deeming it favorable for a strategy that switches funds between stocks and fixed income.
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