Economic Predictability

Part A

Predictability in Economic Growth

Price-Dividends and Dividend Growth Calculation (a)

Using the formulas (1) and (2), the dividend-yields D_(t+1)/P_(t+1) and dividend-growth D_(t+1)/D_t are computed as follows:

Table 1 - Dividend yields and dividend growth rates.

Date Dividend Yields Dividend Growth Rates

31/12/1929 0.046949998 0.445520076

31/12/1930 0.076475911 -0.326344011

31/12/1931 0.173232637 -0.876182544

31/12/1932 0.081040752 -0.302824599

30/12/1933 0.02948685 -0.057076416

31/12/1934 0.041007872 0.573842565

…

31/12/2010 0.018598958 0.232329204

30/12/2011 0.021471324 0.163716225

31/12/2012 0.022146696 -0.032529911

Dividend Growth and Industrial Production (b)

Plotting the calculated dividend growth rates versus the industrial production provided in the excel sheet, we obtain the following visualization of the two time series:

Figure 1 - Dividend Growth and the Industrial Production Index

Viewing the two time series, it seems that the time series demonstrate a negative correlation at several time periods. Observing the data points from 1926 to 1970, it seems that the relative movement of the two change rates is negative. The overlapping of spikes and downfalls in data eases towards the end of the 20th century but shows similar movements in after the millennium. Analyzing Figure 1, it would be plausible to assume a very unrefined predictability of dividend growth rates based on the industrial production index.

Price-Dividend Ratio and Industrial Production (c)

Similarly to the previous sub-chapter, we obtain a visualization of the relationship between the price-dividend ratio and the change rate of the industrial production index by plotting the two time series in a line plot.

Figure 2 - Price-Dividend Ratio and Industrial Production

The price-dividend ratio and the industrial production seem to move in the same direction, additionally converging together, when plotted on two different axes. Hence, it is reasonable to assume positive correlation between the two data sets.

Figure 3 - Holding Period Returns, T-Bill Returns,