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Output and Expected Returns - a multicountry study

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  • Rangvid, Jesper

    (Department of Finance, Copenhagen Business School)

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    Abstract

    This paper analyzes whether the price-output ratio (the cpy-ratio) predicts real stock returns in twelve OECD countries. The cpy-ratio is a ratio of a share price to a macroeconomic variable. Traditionally, either ratios of purely financial indicators, ratios of purely macroeconomic indicators, or ratios of macroeconomic indicators to wealth have been used to predict returns. However, if share prices are mean reverting, and thus contain a predictable component, and predictability of returns is related to the macroeconomic environment that ultimately determines the investment opportunities, a ratio of a share price to a macroeconomic variable could be believed to predict returns. The analyses reveal that the cpy-ratios do indeed predict future stock returns in most of the countries that are studied.

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    File URL: http://openarchive.cbs.dk/cbsweb/handle/10398/7187
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    Bibliographic Info

    Paper provided by Copenhagen Business School, Department of Finance in its series Working Papers with number 2002-8.

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    Length: 55 pages
    Date of creation: 01 Dec 2002
    Date of revision:
    Handle: RePEc:hhs:cbsfin:2002_008

    Contact details of provider:
    Postal: Department of Finance, Copenhagen Business School, Solbjerg Plads 3, A5, DK-2000 Frederiksberg, Denmark
    Phone: +45 3815 3815
    Email:
    Web page: http://www.cbs.dk/departments/finance/
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    Related research

    Keywords: share prices; output of firms; return predictability;

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    References

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    1. John Y. Campbell, 2000. "Asset Pricing at the Millennium," NBER Working Papers 7589, National Bureau of Economic Research, Inc.
    2. Robert J. Shiller & John Y. Campbell, 1986. "The Dividend-Price Ratio and Expectations of Future Dividends and Discount Factors," Cowles Foundation Discussion Papers 812, Cowles Foundation for Research in Economics, Yale University.
    3. Campbell, John, 1993. "Intertemporal Asset Pricing Without Consumption Data," Scholarly Articles 3221491, Harvard University Department of Economics.
    4. Martin Lettau & Sydney Ludvigson, 2003. "Expected Returns and Expected Dividend Growth," NBER Working Papers 9605, National Bureau of Economic Research, Inc.
    5. Lamont, Owen A., 2001. "Economic tracking portfolios," Journal of Econometrics, Elsevier, vol. 105(1), pages 161-184, November.
    6. Sydney Ludvigson & Martin Lettau, 1999. "Consumption, aggregate wealth and expected stock returns," Staff Reports 77, Federal Reserve Bank of New York.
    7. Fama, Eugene F. & French, Kenneth R., 1989. "Business conditions and expected returns on stocks and bonds," Journal of Financial Economics, Elsevier, vol. 25(1), pages 23-49, November.
    8. Lettau, Martin & Ludvigson, Sydney, 2001. "Measuring and Modelling Variation in the Risk-Return Trade-off," CEPR Discussion Papers 3105, C.E.P.R. Discussion Papers.
    9. Martin Lettau & Sydney Ludvigson, 1999. "Resurrecting the (C)CAPM: a cross-sectional test when risk premia are time-varying," Staff Reports 93, Federal Reserve Bank of New York.
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