Decomposing the Earnings-to-Price Ratio and the Cross-section of International Equity-Index Returns

46 Pages Posted: 11 Dec 2019

See all articles by Mehmet Umutlu

Mehmet Umutlu

Yasar University - Department of International Trade and Finance

Pelin Bengitoz

Yasar University - Deparment of International Trade and Finance

Adam Zaremba

Poznań University of Economics and Business; University of Dubai

Date Written: November 23, 2019

Abstract

We examine whether components of the earnings-to-price (EP) ratio can be used to extract incremental information to better estimate future returns in the cross-section of country-industry indexes. We demonstrate that the EP components such as lagged EP, changes in earnings, short-term momentum and long-term reversal in prices increase the accuracy of return forecasts. The EP decomposition matters in developed markets, as well as in North America, Europe, Asia, and MENA, but is pointless in emerging countries, as well as in South America and Japan. Decomposing EP into its components is a worthwhile effort in the majority of industries examined. The results are robust to modifications in the methodology, sub-period analyses, the use of an alternative sample and remain unchanged after controlling for net share issuance and size effects.

Keywords: International Investment, E/P Decomposition, Value Effect, Equity Anomalies, Index Returns, Return Predictability

JEL Classification: G11, G12, G17

Suggested Citation

Umutlu, Mehmet and Bengitoz, Pelin and Zaremba, Adam, Decomposing the Earnings-to-Price Ratio and the Cross-section of International Equity-Index Returns (November 23, 2019). Available at SSRN: https://ssrn.com/abstract=3492355 or http://dx.doi.org/10.2139/ssrn.3492355

Mehmet Umutlu (Contact Author)

Yasar University - Department of International Trade and Finance ( email )

Universite Street
Izmir
Turkey

Pelin Bengitoz

Yasar University - Deparment of International Trade and Finance ( email )

Universite Street
Izmir
Turkey

Adam Zaremba

Poznań University of Economics and Business ( email )

al. Niepodległości 10
Poznań, 61-875
Poland

HOME PAGE: http://adamzaremba.pl

University of Dubai ( email )

Academic City
Dubai, 14143
United Arab Emirates

HOME PAGE: http://adamzaremba.pl/

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