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A century of equity premium predictability and the consumption-wealth ratio: An international perspective

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  • Della Corte, Pasquale
  • Sarno, Lucio
  • Valente, Giorgio

Abstract

This paper re-examines the predictive ability of the consumption-wealth ratio (cay) on the equity premium using hand-collected annual data spanning one century for four major economies. In addition to statistical tests of out-of-sample forecast accuracy, we measure the economic value of the predictive information in cay in a stylized asset allocation strategy. We find that cay does not contain predictive power prior to World War II, when a structural break occurs for all countries. In the postwar period, while statistical tests provide mixed evidence, economic criteria uncover substantial predictive power in cay, further enhanced when allowing for economically meaningful restrictions.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of Empirical Finance.

Volume (Year): 17 (2010)
Issue (Month): 3 (June)
Pages: 313-331

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Handle: RePEc:eee:empfin:v:17:y:2010:i:3:p:313-331

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Web page: http://www.elsevier.com/locate/jempfin

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Keywords: Predictability of asset returns Consumption-wealth ratio Equity premium Economic value;

References

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Cited by:
  1. Cem Cakmakli & Dick van Dijk, 2010. "Getting the Most out of Macroeconomic Information for Predicting Stock Returns and Volatility," Tinbergen Institute Discussion Papers 10-115/4, Tinbergen Institute.
  2. Daniel L. Thornton & Giorgio Valente, 2009. "Revisiting the predictability of bond risk premia," Working Papers 2009-009, Federal Reserve Bank of St. Louis.
  3. Shue-Jen Wu & Wei-Ming Lee, 2012. "Predicting the U.S. bear stock market using the consumption-wealth ratio," Economics Bulletin, AccessEcon, vol. 32(4), pages 3174-3181.
  4. Ren, Yu & Yuan, Yufei & Zhang, Yang, 2014. "Human capital, household capital and asset returns," Journal of Banking & Finance, Elsevier, vol. 42(C), pages 11-22.
  5. Aono, Kohei & Iwaisako, Tokuo, 2013. "The consumption–wealth ratio, real estate wealth, and the Japanese stock market," Japan and the World Economy, Elsevier, vol. 25, pages 39-51.

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