International stock return predictability: Evidence from new statistical tests
Olivier Darné and
Jae Kim ()
International Review of Financial Analysis, 2017, vol. 54, issue C, 97-113
We investigate whether stock returns of international markets are predictable from a range of fundamentals including key financial ratios (dividend-price ratio, dividend-yield, earnings-price ratio, dividend-payout ratio), technical indicators (price pressure, change in volume), and short-term interest rates. We adopt two new alternative testing and estimation methods: the improved augmented regression method and wild bootstrapping of predictive model based on a restricted VAR form. Both methods take explicit account of endogeneity of predictors, providing bias-reduced estimation and improved statistical inference in small samples. From monthly data of 16 Asia-Pacific (including U.S.) and 21 European stock markets from 2000 to 2014, we find that the financial ratios show weak predictive ability with small effect sizes and poor out-of-sample forecasting performances. In contrast, the price pressure and interest rate are found to be strong predictors for stock return with large effect sizes and satisfactory out-of-sample forecasting performance.
Keywords: Augmented regression method; Financial ratios; Forecasting; Technical indicators; Wild bootstrap (search for similar items in EconPapers)
JEL-codes: G12 G14 (search for similar items in EconPapers)
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Working Paper: International Stock Return Predictability: Evidence from New Statistical Tests (2017)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:finana:v:54:y:2017:i:c:p:97-113
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