Topic

With the development of global economy, there are various types of firms in the financial market, such as sole proprietorships, partnerships, corporations and limited liability companies. Even though the kind of firms is different, the ultimate goal that is to make profit is the same. So the return predictability plays an important role in making the investment decision of a corporation. The average return on common stocks is different because of the different firm characteristic, such as, dividends, stock prices and investment horizons. In this dissertation, I plan to research the relationship between the predictability of return and these variables. I plan to select the financial market in the United States and the United Kingdom*…show more content…*

Due to the expect return need a large number of historical figures to estimate the future outcome, I need to build a time series model to analysis these variables except for the mathematical derivation. So this dissertation through compare two theories which are Jonathan and Peter theory and Fama and French theory respectively to investigate the influence of different variables on the return predictability.

Theory

Both of these two theories are based on a basic rule that is the law of one price. The rule indicates that the price of a security is equal to the discounted value of the cash flows in the future when the investor purchases it.

Jonathan and Peter use a lot of mathematical inference to analysis the stock return from one year to many years, which is called the dividend-discount model. Besides, the dividend growth is also considered in which forms the constant dividend growth model finally. From these formulas, it can be easily observed that the expect return of a security is a function about the dividend yield ( ).

For one year:

For multiyear:

Constant dividend growth model: Although Jonathan and Peter have been carried out the relationship between the dividend yield and the expected return, there is a general lack of research in the impact of different horizons on the return. This problem is that the correlation between variance horizons and the anticipated return, which is solved by Fama and French through a regression test:

r(t,

With the development of global economy, there are various types of firms in the financial market, such as sole proprietorships, partnerships, corporations and limited liability companies. Even though the kind of firms is different, the ultimate goal that is to make profit is the same. So the return predictability plays an important role in making the investment decision of a corporation. The average return on common stocks is different because of the different firm characteristic, such as, dividends, stock prices and investment horizons. In this dissertation, I plan to research the relationship between the predictability of return and these variables. I plan to select the financial market in the United States and the United Kingdom

Due to the expect return need a large number of historical figures to estimate the future outcome, I need to build a time series model to analysis these variables except for the mathematical derivation. So this dissertation through compare two theories which are Jonathan and Peter theory and Fama and French theory respectively to investigate the influence of different variables on the return predictability.

Theory

Both of these two theories are based on a basic rule that is the law of one price. The rule indicates that the price of a security is equal to the discounted value of the cash flows in the future when the investor purchases it.

Jonathan and Peter use a lot of mathematical inference to analysis the stock return from one year to many years, which is called the dividend-discount model. Besides, the dividend growth is also considered in which forms the constant dividend growth model finally. From these formulas, it can be easily observed that the expect return of a security is a function about the dividend yield ( ).

For one year:

For multiyear:

Constant dividend growth model: Although Jonathan and Peter have been carried out the relationship between the dividend yield and the expected return, there is a general lack of research in the impact of different horizons on the return. This problem is that the correlation between variance horizons and the anticipated return, which is solved by Fama and French through a regression test:

r(t,

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