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Predicting international stock returns with conditional price-to-fundamental ratios

Jochen Lawrenz and Josef Zorn

Journal of Empirical Finance, 2017, vol. 43, issue C, 159-184

Abstract: Taking the perspective of international asset allocation, this paper tests if predictive regressions conditional on time-series and cross-sectional information can improve forecasts of stock index returns. We use different current price-to-fundamental ratios as predictors and condition the sample on the indicator if time-series and cross-section deliver consistent versus opposing signals. Using panel regressions, we find that only consistent ratios (i) display significant mean-reverting behavior, (ii) provide strong in-sample as well as out-of-sample evidence for return predictability, and (iii) yield economic gains in a Bayesian asset allocation framework.

Keywords: International stock market returns; International asset allocation; Predictability; Price to fundamental ratios (search for similar items in EconPapers)
JEL-codes: G11 G12 G15 G17 (search for similar items in EconPapers)
Date: 2017
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Journal of Empirical Finance is currently edited by R. T. Baillie, F. C. Palm, Th. J. Vermaelen and C. C. P. Wolff

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Handle: RePEc:eee:empfin:v:43:y:2017:i:c:p:159-184