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Output and Expected Returns - a multicountry study

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  • Rangvid, Jesper

    (Department of Finance, Copenhagen Business School)

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.

Suggested Citation

  • Rangvid, Jesper, 2002. "Output and Expected Returns - a multicountry study," Working Papers 2002-8, Copenhagen Business School, Department of Finance.
  • Handle: RePEc:hhs:cbsfin:2002_008
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    File URL: http://openarchive.cbs.dk/cbsweb/handle/10398/7187
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    References listed on IDEAS

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    1. John Y. Campbell, 2000. "Asset Pricing at the Millennium," Journal of Finance, American Finance Association, vol. 55(4), pages 1515-1567, August.
    2. Martin Lettau, 2001. "Consumption, Aggregate Wealth, and Expected Stock Returns," Journal of Finance, American Finance Association, vol. 56(3), pages 815-849, June.
    3. Lamont, Owen A., 2001. "Economic tracking portfolios," Journal of Econometrics, Elsevier, vol. 105(1), pages 161-184, November.
    4. Martin Lettau & Sydney Ludvigson, 2001. "Resurrecting the (C)CAPM: A Cross-Sectional Test When Risk Premia Are Time-Varying," Journal of Political Economy, University of Chicago Press, vol. 109(6), pages 1238-1287, December.
    5. 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.
    6. Lettau, Martin & Ludvigson, Sydney C., 2005. "Expected returns and expected dividend growth," Journal of Financial Economics, Elsevier, vol. 76(3), pages 583-626, June.
    7. 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.
    8. Campbell, John Y, 1993. "Intertemporal Asset Pricing without Consumption Data," American Economic Review, American Economic Association, vol. 83(3), pages 487-512, June.
    9. John Y. Campbell, Robert J. Shiller, 1988. "The Dividend-Price Ratio and Expectations of Future Dividends and Discount Factors," Review of Financial Studies, Society for Financial Studies, vol. 1(3), pages 195-228.
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    More about this item

    Keywords

    share prices; output of firms; return predictability;

    JEL classification:

    • F30 - International Economics - - International Finance - - - General
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

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