The Dog That Did Not Bark: A Defense of Return Predictability

The Dog That Did Not Bark: A Defense of Return Predictability

Cochrane, John H.
The Review of Financial Studies 21, no. 4 (2008): 1533-1575.
https://doi.org/10.1093/rfs/hhm046

“If returns really are not forecastable, then dividend growth must be forecastable in order to generate the observed variation in dividend-price ratios. We should see that forecastability. Yet, even looking 25 years out, there is not a shred of evidence that high market price dividend ratios are associated with higher subsequent dividend growth (Figure 7). Even if we convince ourselves that the return-forecasting evidence crystallized in Fama and French (1988) regressions is statistically insignificant, we still leave unanswered the challenge crystallized by Shiller (1981) volatility tests: If not dividend growth or expected returns, what does move prices?”

— John H. Cochrane