Excess Asset Returns Predictability in an Emerging Economy: The Case of Colombia

Martha López and Eduardo Sarmiento

Borradores de Economia from Banco de la Republica de Colombia

Abstract: We examine the extent in which the ratios of book-to-market and earnings-to-price predict excess asset returns in an emerging market economy like Colombia. We want to find the magnitude in which these ratios help to forecast excess returns and if there is any evidence that one of the ratios outperforms the other. In addition, we want to address the impact of the spread between the domestic and the foreign policy interest rate in the excess asset returns. Using Bayesian techniques, we find that the magnitude of the effect is similar for both ratios and that the impact is slightly higher in the case of firms with higher book-to-market ratios. Moreover, we find evidence that the spread of interest rates explains the excess returns in a way according to the Uncovered Interest Parity theory. **** RESUMEN: Analizamos en qué medida las relaciones de book-to-market y de ganancia-a-precio tienen poder predictivo de los excesos de retorno en una economía emergente como la colombiana. Queremos responder cuál es la magnitud en que estas relaciones ayudan a pronosticar los excesos de retorno y si hay alguna evidencia de que una sea mayor que la otra. Adicionalmente, queremos analizar cuál es el impacto del diferencial de tasas de interés de política doméstica y externa sobre los excesos de retorno. Mediante técnicas Bayesianas encontramos que la magnitud del efecto es similar para las dos relaciones y que el impacto es un poco mayor en el caso de firmas con razón de book-to-market más alta. Más aún, encontramos evidencia que el diferencial de tasas de interés explica los excesos de retornos en línea con las predicciones de la teoría de Paridad No-cubierta de Intereses.

Keywords: Book-to-market; Earnings-to-price; Excess returns; Bayesian; Book-to market; ganancia-a-precio; excesos de retorno; bayesiano (search for similar items in EconPapers)
JEL-codes: C11 C15 G12 G17 (search for similar items in EconPapers)
Pages: 33
Date: 2023-06
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https://doi.org/10.32468/be.1243

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Journal Article: Excess Asset Returns Predictability in an Emerging Economy: The Case of Colombia (2023)
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Persistent link: https://EconPapers.repec.org/RePEc:bdr:borrec:1243

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