Book-to-Market, Dividend Yield, and Expected Market Returns: A Time-Series Analysis

A study finds reliable evidence that both book-to-market (B/M) and dividend yield track time-series variation in expected real stock returns over the period 1926-1991 and the subperiod 1941-1991. A Bayesian bootstrap procedure implies that an investor with prior belief 0.5 that expected returns on the equal-weighted index are never negative comes away from the full-period B/M evidence with posterior probability 0.08 for the hypothesis. Although this raises doubts about market efficiency, the post-1940 evidence is consistent with expected returns always being positive.