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Predicting Global Stock Returns

Published online by Cambridge University Press:  26 November 2009

Erik Hjalmarsson
Erik Hjalmarsson*
Affiliation:
Federal Reserve Board, Mail Stop 20, Washington, DC 20551. ehjalmar@gmail.com
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Abstract

I test for stock return predictability in the largest and most comprehensive data set analyzed so far, using four common forecasting variables: the dividend-price (DP) and earnings-price (EP) ratios, the short interest rate, and the term spread. The data contain over 20,000 monthly observations from 40 international markets, including 24 developed and 16 emerging economies. In addition, I develop new methods for predictive regressions with panel data. Inference based on the standard fixed effects estimator is shown to suffer from severe size distortions in the typical stock return regression, and an alternative robust estimator is proposed. The empirical results indicate that the short interest rate and the term spread are fairly robust predictors of stock returns in developed markets. In contrast, no strong or consistent evidence of predictability is found when considering the EP and DP ratios as predictors.

Type
Research Articles
Information
Journal of Financial and Quantitative Analysis , Volume 45 , Issue 1 , February 2010 , pp. 49 - 80
Copyright
Copyright © Michael G. Foster School of Business, University of Washington 2010

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