Predicting Global Stock Returns

Board of Governors of the Federal Reserve System, International Finance Discussion Paper No. 933

56 Pages Posted: 10 Jul 2008

See all articles by Erik Hjalmarsson

Erik Hjalmarsson

University of Gothenburg - Centre for Finance

Date Written: June 2008

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- and earnings-price 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 earnings- and dividend-price ratios as predictors.

Keywords: Cross-sectional dependence, Panel data, Pooled regression, Predictive regression, Stock return predictability

JEL Classification: C22, C23, G12, G15

Suggested Citation

Hjalmarsson, Erik, Predicting Global Stock Returns (June 2008). Board of Governors of the Federal Reserve System, International Finance Discussion Paper No. 933 . Available at SSRN: https://ssrn.com/abstract=1158041 or http://dx.doi.org/10.2139/ssrn.1158041

Erik Hjalmarsson (Contact Author)

University of Gothenburg - Centre for Finance ( email )

Box 640
Gothenburg, 403 50
Sweden

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