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Predicting Global Stock Returns

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  • Hjalmarsson, Erik

Abstract

I test for stock return predictability in the largest and most comprehensive data set analyzed so far, using four common forecasting variables: the dividend- and earnings-price ratios, the short interest rate, and the term spread. The data contain over 20,000 monthly observations from 40 international markets, including 24 developed and 16 emerging economies. In addition, I develop new methods for predictive regressions with panel data. Inference based on the standard fixed effects estimator is shown to suffer from severe size distortions in the typical stock return regression, and an alternative robust estimator is proposed. The empirical results indicate that the short interest rate and the term spread are fairly robust predictors of stock returns in developed markets. In contrast, no strong or consistent evidence of predictability is found when considering the earnings- and dividend-price ratios as predictors.

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Bibliographic Info

Article provided by Cambridge University Press in its journal Journal of Financial and Quantitative Analysis.

Volume (Year): 45 (2010)
Issue (Month): 01 (February)
Pages: 49-80

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Handle: RePEc:cup:jfinqa:v:45:y:2010:i:01:p:49-80_99

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Citations

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Cited by:
  1. Nitschka, Thomas, 2014. "Developed markets’ business cycle dynamics and time-variation in emerging markets’ asset returns," Journal of Banking & Finance, Elsevier, vol. 42(C), pages 76-82.
  2. Guidolin, Massimo & McMillan, David G. & Wohar, Mark E., 2013. "Time varying stock return predictability: Evidence from US sectors," Finance Research Letters, Elsevier, vol. 10(1), pages 34-40.
  3. McMillan, David G., 2013. "Consumption and stock prices: Evidence from a small international panel," Journal of Macroeconomics, Elsevier, vol. 36(C), pages 76-88.
  4. Deniz Baglan & Emre Yoldas, 2013. "Government debt and macroeconomic activity: a predictive analysis for advanced economies," Finance and Economics Discussion Series 2013-05, Board of Governors of the Federal Reserve System (U.S.).
  5. Chen, Sichong, 2012. "The predictability of aggregate Japanese stock returns: Implications of dividend yield," International Review of Economics & Finance, Elsevier, vol. 22(1), pages 284-304.
  6. Ralph S.J. Koijen & Stijn Van Nieuwerburgh, 2011. "Predictability of Returns and Cash Flows," Annual Review of Financial Economics, Annual Reviews, vol. 3(1), pages 467-491, December.
  7. Westerlund, Joakim & Urbain, Jean-Pierre, 2013. "On the implementation and use of factor-augmented regressions in panel data," Journal of Asian Economics, Elsevier, vol. 28(C), pages 3-11.
  8. Tim Bollerslev & James Marrone & Lai Xu & Hao Zhou, 2011. "Stock return predictability and variance risk premia: statistical inference and international evidence," Finance and Economics Discussion Series 2011-52, Board of Governors of the Federal Reserve System (U.S.).
  9. Nitschka, Thomas, 2013. "The impact of (global) business cycle risk on the German and British stock markets: Evidence from the first age of globalization," Review of Financial Economics, Elsevier, vol. 22(3), pages 118-124.
  10. Pástor, Luboš & Stambaugh, Robert F. & Taylor, Lucian, 2014. "Scale and Skill in Active Management," CEPR Discussion Papers 9854, C.E.P.R. Discussion Papers.
  11. Christopher J. Neely & David E. Rapach & Jun Tu & Guofu Zhou, 2011. "Forecasting the Equity Risk Premium: The Role of Technical Indicators," Working Papers CoFie-02-2011, Sim Kee Boon Institute for Financial Economics.
  12. Cheolbeom Park & Dong-hun Shin, 2014. "Stock Market Predictability: Global Evidence and an Explanation," Discussion Paper Series 1405, Institute of Economic Research, Korea University.
  13. Erik Hjalmarsson & Peter Manchev, 2009. "Characteristic-based mean-variance portfolio choice," International Finance Discussion Papers 981, Board of Governors of the Federal Reserve System (U.S.).
  14. Thomas Nitschka, 2012. "Global and country-specific business cycle risk in time-varying excess returns on asset markets," Working Papers 2012-10, Swiss National Bank.
  15. Erik Hjalmarsson, 2007. "The Stambaugh bias in panel predictive regressions," International Finance Discussion Papers 914, Board of Governors of the Federal Reserve System (U.S.).
  16. Nuno Silva, 2013. "Equity Premia Predictability in the EuroZone," GEMF Working Papers 2013-22, GEMF - Faculdade de Economia, Universidade de Coimbra.

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