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- Publisher Website: 10.1016/j.jempfin.2023.02.004
- WOS: WOS:000956391600001
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Article: Stock Return Predictability And Cyclical Movements In Valuation Ratios
Title | Stock Return Predictability And Cyclical Movements In Valuation Ratios |
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Authors | |
Issue Date | 2023 |
Citation | Journal of Empirical Finance, 2023, Forthcoming How to Cite? |
Abstract | According to present-value models, financial valuation ratios should predict future stock returns or cash flows; however, when tested empirically, these ratios show little power. This paper develops insights into stock return predictability and reconciles the contradictory findings about the information provided by financial ratios. We decompose a financial ratio into a slow-moving component that reflects the time-varying local mean, and a cyclical component that reflects the transitory deviations of the ratio from its local mean. The cyclical components deliver substantially improved in- and out-of-sample forecast gains of stock returns and cash flows relative to the original financial ratios and the historical average benchmark. Conversely, the slow-moving components fail to predict returns, and therefore they are found to disguise the predictive information contained in the financial ratios for stock returns and cash flows. |
Persistent Identifier | http://hdl.handle.net/10722/325869 |
ISI Accession Number ID |
DC Field | Value | Language |
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dc.contributor.author | Yu, D | - |
dc.contributor.author | Huang, D | - |
dc.contributor.author | Chen, L | - |
dc.date.accessioned | 2023-03-06T01:25:25Z | - |
dc.date.available | 2023-03-06T01:25:25Z | - |
dc.date.issued | 2023 | - |
dc.identifier.citation | Journal of Empirical Finance, 2023, Forthcoming | - |
dc.identifier.uri | http://hdl.handle.net/10722/325869 | - |
dc.description.abstract | According to present-value models, financial valuation ratios should predict future stock returns or cash flows; however, when tested empirically, these ratios show little power. This paper develops insights into stock return predictability and reconciles the contradictory findings about the information provided by financial ratios. We decompose a financial ratio into a slow-moving component that reflects the time-varying local mean, and a cyclical component that reflects the transitory deviations of the ratio from its local mean. The cyclical components deliver substantially improved in- and out-of-sample forecast gains of stock returns and cash flows relative to the original financial ratios and the historical average benchmark. Conversely, the slow-moving components fail to predict returns, and therefore they are found to disguise the predictive information contained in the financial ratios for stock returns and cash flows. | - |
dc.language | eng | - |
dc.relation.ispartof | Journal of Empirical Finance | - |
dc.title | Stock Return Predictability And Cyclical Movements In Valuation Ratios | - |
dc.type | Article | - |
dc.identifier.email | Huang, D: difang@hku.hk | - |
dc.identifier.authority | Huang, D=rp03052 | - |
dc.identifier.doi | 10.1016/j.jempfin.2023.02.004 | - |
dc.identifier.hkuros | 344396 | - |
dc.identifier.volume | Forthcoming | - |
dc.identifier.isi | WOS:000956391600001 | - |