The World Business Cycle and Expected Returns*

Abstract

Abstract. We study the predictability of stock returns using a pure macroeconomic measure of the world business cycle, namely the world's capital to output ratio. This variable tracks variation in expected stock returns in a group of the major industrial economies in the presence of world nancial market based predictor variables. The world's capital to output ratio exhibits strong out-of-sample predictive power in almost all countries studied. This is in contrast to nancial market based variables that almost never have out-of-sample forecasting power. Using the stock return predictability that we uncover, we nd that international versions of conditional asset pricing models perform well. The world capital to output ratio also predicts bond returns, interest rate changes and credit spreads. The results highlight the importance of world business conditions for nancial markets.

Predicting the equity premium with the demand for gold coins and bars

“…Recent studies either focus on the improvement of out-of-sample performance (Rapach, Strauss and Zhou, 2010;Johannes, Korteweg and Polson, 2014), the study of regional or international markets (Korniotis and Kumar, 2013;Rapach, Strauss and Zhou, 2013), or new predictors that have not been studied before. Bakshi, Panayotov and Skoulakis (2012) suggest the Baltic Dry Index as a proxy for real economic activity and Cooper and Priestley (2013) propose the world's capital to output ratio as a predictor. Our paper contributes to this latter branch of the literature.…”

Price Jumps during Financial Crisis: From Intuition to Financial Regulation

“…Reakce specifi cké pro společnosti a sektory ukazují propojení burzy cenných papírů a reálné ekonomiky, viz např. Cooper a Priestley (2013) pro diskuzi propojení mezi oceňo-váním aktiv a ekonomickými a fi nančními proměnnými. Na druhou stranu, BCPP vykazuje relativně marginální reakce; nacházíme celkový nárůst volatility, nicméně změny v příchodu skoků a struktuře volatility jsou téměř nezjistitelné v dlouhém období.…”

Stock return predictability and market integration: The role of global and local information

“…Extending this further, it is our view that the nature of global information is greater than that captured only through US variables (a point equally made in Cooper & Priestley, 2013). Therefore, using principal components analysis, we identify those factors that account for the majority of the variations across international returns and dividend-price ratios.…”

“…Evidence of significant US-based variables in non-US markets would indicate the presence of global information. More recently, Cooper and Priestley (2013) argue that a measure of the world business cycle captures stock return predictability in seven developed markets. This, they argue, highlights two important findings.…”