Scandinavian Working Papers in Economics

Working Papers,
Copenhagen Business School, Department of Finance

No 2002-8: Output and Expected Returns - a multicountry study

Jesper Rangvid
Additional contact information
Jesper Rangvid: Department of Finance, Copenhagen Business School, Postal: Department of Finance, Copenhagen Business School, Solbjerg Plads 3, A5, DK-2000 Frederiksberg, Denmark

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.

Keywords: share prices; output of firms; return predictability

JEL-codes: F30; G15

55 pages, December 1, 2002

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