Predictive content of the stock market for output revisited

Abstract

In-sample and out-of-sample evidence for major countries shows that stock price determinants (earnings, risk-free interest rate and equity risk premium) accurately predict real Gross Domestic Product beyond 1 year compared to the stock price index, dividend yield, price/earnings ratio and the Fed model.

Notes

¹Other alternative model specifications are possible, such as Equation 9(9) with the earnings yield instead of the dividend yield, and Equation 11(11) with the bond/dividend yield ratio instead of the bond/earnings yield ratio. These alternatives result in similar findings. Alternatives for Equations 8(8) and 12(12) consider nominal instead of real stock prices and earnings, respectively. Both alternatives generally provide a somewhat weaker predictive content of the stock market for real output.

²The codes, with CC denoting the country code, for the stock price index in local currency, P/E ratio, price/cash flow ratio, dividend yield, forward earnings and 10-year government bond yield are TOTMKCC(PI), TOTMKCC(PE), TOTMKCC(PC), TOTMKCC(DY), CC(AG12FE) and IGCC10, respectively.