Forecasting Japanese Stock Returns with Financial Ratios and Other Variables
- 350 Downloads
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.
KeywordsForecastability of stock returns Price–earnings ratio Price dividend ratio
Unable to display preview. Download preview PDF.
- Aono K. (2008) Predictability in Japanese stock market (in Japanese, Nihono no Kabushikisijyo no Yosoku Kanousei). Modern Finance (Gendai Finance) 24: 23–43Google Scholar
- Aono, K., & Iwaisako, T. (2008). The consumption-wealth ratio, real estate wealth, and the Japanese stock market. IER Discussion Paper, #A.504, Hitotsubashi University, July 2008. http://www.ier.hit-u.ac.jp/Common/publication/DP/DP504.pdf.
- Aono, K., & Iwaisako, T. (2009). Aggregate return predictability and the cross-section of Japanese stock returns (in Japanese, Kabushiki Shuekiritsu no Yosoku Kanousei to Cross-section). paper presented at NFA annual meeting 2009 at Aoyama Gakuin University (2009, May 9).Google Scholar
- Campbell J. Y., Lo A. W., MacKinlay A. C. (1997) The econometrics of financial markets. Princeton University Press, Princeton, NJGoogle Scholar
- Shiller R. J. (1989) Market volatility. MIT Press, Cambridge, MAGoogle Scholar
- Shiller R. J. (2005) Irrational exuberance (2nd ed.). Princeton University Press, PrincetonGoogle Scholar