Predicting the Equity Premium around the Globe: Comprehensive Evidence from a Large Sample

Abstract

By studying 81 countries over a period of up to 144 years, with different classes of predictor variables and various forecast specifications, we conduct the most comprehensive equity premium predictability analysis to date. We find that excess returns are more predictable in Emerging and Frontier than in Developed Markets. For all groups, forecast combinations perform very well out-of-sample. Analyzing the cross-section of countries, we find that both market inefficiency and the variation in expected returns over time are important drivers of return predictability. Finally, domestic inflation-adjusted returns are substantially more predictable than USD returns.

Keywords: International equity premium, return predictability, market efficiency

JEL Classification: G10, G11, G15, G17