Forecasting Equity Returns: An Analysis of Macro vs. Micro Earnings and an Introduction of a Composite Valuation Model
String Advisors, Inc
April 28, 2013
With the use of Kalecki’s profit function, we introduce a weakness in the P/E10 market valuation model — probably the most common market valuation metric — and concurrently provide theoretical and statistical support for the Market Capitalization/GDP metric as the preferred stand-alone measure for forecasting equity returns. Next, personal income and personal spending variables are introduced as additional valuation measures that are highly complementary to the Market Cap/GDP metric. Finally, measures from prior research are introduced and incorporated into a composite model, which is significantly better than other known models at forecasting long-term real total returns of the equity market.
Number of Pages in PDF File: 31
Keywords: Kalecki's profit equation, market valuation
JEL Classification: E17working papers series
Date posted: February 22, 2013 ; Last revised: April 28, 2013
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