Output and Expected Returns - a multicountry study

This paper analyzes whether the price-output ratio (the cpy-ratio) predicts real stock returns <p> in twelve OECD countries. The cpy-ratio is a ratio of a share price to a macroeconomic <p> variable. Traditionally, either ratios of purely financial indicators, ratios of purely <p> macroeconomic indicators, or ratios of macroeconomic indicators to wealth have been <p> used to predict returns. However, if share prices are mean reverting, and thus contain <p> a predictable component, and predictability of returns is related to the macroeconomic <p> environment that ultimately determines the investment opportunities, a ratio of a share <p> price to a macroeconomic variable could be believed to predict returns. The analyses <p> reveal that the cpy-ratios do indeed predict future stock returns in most of the countries <p> that are studied.