Predictability of Stock Returns and Dividend Growth Rates in the Korean Stock Market

This paper analyzes the predictive power of the dividend yield in the Korean stock market and compares the market returns predictability and dividend growth rates predictability for manufacturing and financial industries. Also, this paper performs in-sample and out-of-sample tests for this purpose. The empirical findings are summarized as follows. First, in-sample tests reveal that dividend yield can predict market returns but not dividend growth rates for the KOSPI and the manufacturing and financial industries. Second, as the results of the out-of-sample tests, the dividend yield can predict market returns for the KOSPI and the manufacturing industry, but it does not have any predictive power for the financial industry. However, the dividend yield can not predict dividend growth rates for the KOSPI, the manufacturing industries, and financial industries. The contribution of this paper is that the log-linear model is used to analyze the predictive power of the dividend yield in an emerging market, Korea.