Working Papers,
Copenhagen Business School, Department of Finance

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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