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Forecasting Japanese Stock Returns with Financial Ratios and Other Variables

Asia-Pacific financial markets, 2011-11, Vol.18 (4), p.373-384 [Peer Reviewed Journal]

Springer Science+Business Media, LLC. 2010 ;Springer Science+Business Media, LLC. 2011 ;ISSN: 1387-2834 ;EISSN: 1573-6946 ;DOI: 10.1007/s10690-010-9135-z

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Title:
Forecasting Japanese Stock Returns with Financial Ratios and Other Variables
Author: Aono, Kohei ; Iwaisako, Tokuo
Subjects: Data smoothing ; Dividends ; Earnings forecasting ; Earnings per share ; Econometrics ; Economic Theory/Quantitative Economics/Mathematical Methods ; Economics and Finance ; Finance ; Forecastability of stock returns ; Forecasting ; Interest rates ; International Economics ; Macroeconomics/Monetary Economics//Financial Economics ; Market prices ; Price dividend ratio ; Price–earnings ratio ; Return on investment ; Securities markets ; Stock exchanges ; Studies ; Variables
Is Part Of: Asia-Pacific financial markets, 2011-11, Vol.18 (4), p.373-384
Description: This paper extends the previous analyses of the forecastability of Japanese stock market returns in two directions. First, we carefully construct smoothed market price–earnings ratios and examine their predictive ability. We find that the empirical performance of the price–earnings ratio in forecasting stock returns in Japan is generally weaker than both the price–earnings ratio in comparable US studies and the price dividend ratio. Second, we also examine the performance of several other forecasting variables, including lagged stock returns and interest rates. We find that both variables are useful in predicting aggregate stock returns when using Japanese data. However, while we find that the interest rate variable is useful in early subsamples in this regard, it loses its predictive ability in more recent subsamples. This is because of the extremely limited variability in interest rates associated with operation of the Bank of Japan’s zero interest policy since the late 1990s. In contrast, the importance of lagged returns increases in subsamples starting from the 2000s. Overall, a combination of logged price dividend ratios, lagged stock returns, and interest rates yield the most stable performance when forecasting Japanese stock market returns.
Publisher: Boston: Springer US
Language: English
Identifier: ISSN: 1387-2834
EISSN: 1573-6946
DOI: 10.1007/s10690-010-9135-z
Source: Alma/SFX Local Collection
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ProQuest Central

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Forecasting Japanese Stock Returns with Financial Ratios and Other Variables

Springer Science+Business Media, LLC. 2010 ;Springer Science+Business Media, LLC. 2011 ;ISSN: 1387-2834 ;EISSN: 1573-6946 ;DOI: 10.1007/s10690-010-9135-z

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