Book-to-market, dividend yield, and expected market returns: A time-series analysis

We find reliable evidence that both book-to-market (B/M) and dividend yield track time-series variation in expected real stock returns over the period 1926-91 (in which B/M is stronger) and the subperiod 1941-91 (in which dividend yield is stronger). 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 (0.14 with the impact of the 1933 outlier tempered). Although this raises doubts about market efficiency, the post-1940 evidence is consistent with expected returns always being positive.