Risk, Gordon's Growth Model and the Predictability of Stock Market Returns

This paper measures risk by using proxies based on lagged squared returns, the GARCH -M model and consumption correlatedness. It finds :- 

(i) Even after you control for risk, expected inflation is negatively correlated with excess returns in the UK and US in the post-war period.

(ii) Lagged dividend yields help predict excess returns in the post-war period except when they are allowed to affect volatility in a GARCH -M model for the US.

(iii) these results may be interpreted as arising from a modified form of Gordon's growth model, which is seen to contain the standard Efficient Markets Model as a special case

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