Do Decomposed Financial Ratios Predict Stock Returns and Fundamentals Better? Article

cited authors

  • Jiang, X; Lee, BS

fiu authors

abstract

  • We investigate the prediction of excess returns and fundamentals by financial ratios, which include dividend-price ratios, earnings-price ratios, and book-to-market ratios, by decomposing financial ratios into a cyclical component and a stochastic trend component. We find both components predict excess returns and fundamentals. Cyclical components predict increases in future stock returns, while stochastic trend components predict declines in future stock returns in long horizons. This helps explain previous findings that financial ratios in the absence of decomposition find weak predictive power in short horizons and some predictive power in long horizons. We also find both components predict fundamentals. © 2012, The Eastern Finance Association.

publication date

  • August 1, 2012

Digital Object Identifier (DOI)

start page

  • 531

end page

  • 564

volume

  • 47

issue

  • 3