Cointegration analysis of the Fed model

The Fed model postulates that the equity earnings yield follows the bond yield in the long run. Our tests based on a cointegration analysis of the United States, United Kingdom and German data indicate that the Fed model has predictive power in forecasting changes in the equity prices, earnings and bond yields. The predictions are better in the US than in other countries. Our approach consists of building a Vector Equilibrium Correction model which provides a quantitative dynamic version of the Fed model.     

On the relationship between changes in stock prices and bond yields in the G7 countries: Wavelet analysis

The purpose of this paper is to shed a new perspective on the relationship between changes in stock prices and bond yields in the G7 countries. Theoretical studies argue that this relationship may be negative or positive. To investigate the relationship, we model a newly developed time-series technique: wavelet correlation analysis. The key empirical results show that the correlation between changes in stock prices and bond yields can differ from country to country and can also depend on the time scale. Furthermore, wavelet analysis reveals that changes in stock prices and bond yields do not move together in most G7 countries, except in Japan.     

The Ability of Earnings to Predict Future Operating Cash Flows Has Been Increasing—Not Decreasing

We investigate the relationship between earnings and one‐year‐ahead operating cash flows from 1973 to 2000. Although the extant research indicates a weakening relationship between contemporaneous earnings and stock prices over time, we find that the relationship between current earnings and future operating cash flows has increased over time. This result holds for numerous divisions of our sample. Out‐of‐sample predictions of operating cash flows generally show increasing forecast accuracy over time. Increasing accounting conservatism appears to play a role in this phenomenon.     

Modeling International Long-Term Interest Rates

This study investigates the relationship among interest rates on the long-term government bonds of five industrialized countries. Both standard and new unit root tests are applied, all of which confirm the presence of exactly one unit root. New cointegration tests are also applied to these data. In contrast to previous research on short-term bonds, stock prices, and exchange rates, these results find little evidence of cointegration among the five long-term interest rate series. Thus, when modeling or forecasting these central government long-term bond yields, one may assume separate sets of fundamentals and difference the data to achieve stationarity. An error correction model may not be appropriate.     

Comovements of earnings, dividends, and stock prices

We investigate the comovements of the log of earnings, dividends, and stock prices by testing for the number of common stochastic trends among these series. We find that the three series are cointegrated with a single cointegrating vector. Our findings collectively imply that (i) there is an equilibrium force that tends to keep these series together over time, (ii) changes in dividends are primarily influenced by changes in some measure of permanent earnings, and (iii) a substantial fraction of stock price movement is driven by neither earnings changes nor dividend changes. When we take into account the cointegration relationship, we find that the dynamic relationship between these variables is significantly affected. We present a common stochastic trends model of earnings, dividends, and stock prices, whose implications are broadly consistent with these findings.     

The effect of earnings quality and country-level institutions on the value relevance of earnings

This study investigates the relationship between the value relevance of earnings and earnings quality across countries. We find that there is a stronger relationship between earnings quality and the value relevance of earnings in countries with high investor protection than in countries with weak investor protection. We also find that the association between the value relevance of earnings and earnings quality is higher when a country’s information environment is less opaque. Overall, our study documents evidence on international differences in the ability of stock prices to capture useful accounting information, consistent with the notion that the returns-earnings association reflects not only the quality of accounting earnings but also the informativeness of stock prices.     

Earnings dispersion and aggregate stock returns

This paper studies the relation between aggregate stock returns and contemporaneous and future cross-sectional earnings dispersion. We hypothesize that increases in expected earnings dispersion signal increases in uncertainty and increases in unemployment, thereby causing expected returns to rise, which in turn causes prices to decline. We find a positive relation between aggregate stock returns and contemporaneous earnings dispersion because higher earnings dispersion is associated with higher expected returns. Consequently, we also find a negative relation between aggregate stock returns and future (one-year ahead) earnings dispersion, as investors anticipate higher future earnings dispersion and higher expected returns.     

LONG-TERM AND SHORT-TERM CAUSAL RELATIONS BETWEEN DIVIDENDS AND STOCK PRICES: A TEST OF LINTNER'S DIVIDEND MODEL AND THE PRESENT VALUE MODEL OF STOCK PRICES

In this paper we test the joint implications for the intertemporal behavior of stock prices and dividends expressed in the Lintner dividend model and the present value model of stock prices. We use macro data corresponding to quarterly S&P 500 index prices and dividends for January 1930–December 1990. The methodology used is the error correction model (ECM), which allows testing for long-term and short-term relations between the two variables. Results from the ECM indicate that a long-term equilibrium relation exists between dividends and stock prices, and that an error correction mechanism is at work when a disequilibrium exits between the two variables. Stock prices and dividends also influence each other in the short term. Finally, the results show that dividends and stock prices exhibit a contemporaneous causal relation.     

Estimating the Intertemporal Risk–Return Tradeoff Using the Implied Cost of Capital

We argue that the implied cost of capital (ICC), computed using earnings forecasts, is useful in capturing time variation in expected stock returns. First, we show theoretically that ICC is perfectly correlated with the conditional expected stock return under plausible conditions. Second, our simulations show that ICC is helpful in detecting an intertemporal risk–return relation, even when earnings forecasts are poor. Finally, in empirical analysis, we construct the time series of ICC for the G–7 countries. We find a positive relation between the conditional mean and variance of stock returns, at both the country level and the world market level.     

Inflation and the stock market: Understanding the “Fed Model”

The so-called Fed model postulates that the dividend or earnings yield on stocks should equal the yield on nominal Treasury bonds, or at least that the two should be highly correlated. In US data there is indeed a strikingly high time series correlation between the yield on nominal bonds and the dividend yield on equities. This positive correlation is often attributed to the fact that both bond and equity yields comove strongly and positively with expected inflation. Contrary to some of the extant literature, we show that this effect is consistent with modern asset pricing theory incorporating uncertainty about real growth prospects and habit-based risk aversion. In the US, high expected inflation has tended to coincide with periods of heightened uncertainty about real economic growth and unusually high risk aversion, both of which rationally raise equity yields.     

The information content of security prices

The study derives a relationship between prices changes and earnings changes by expanding the information upon which earnings expectations are conditioned to include data other than prior earnings history. In particular, price is used as a surrogate for additional information available to market participants. This relationship provides an interpretation of the contemporaneous association between price changes and earnings changes previously observed by Ball and Brown (1968) and Beaver, Clarke and Wright (1979), among others. It also provides a basis for inferring from prices the earnings process and the expected future earnings as perceived by market participants. In doing so, it inverts the familiar price-earnings relationship and uses price as a predictor of earnings. The study differs from previous research which has examined the time series behavior of earnings based solely on previous earnings realizations. This approach can potentially lead to earnings forecasting models that are more accurate than the random walk with a drift that has been robust against challengers. In particular, the evidence indicates that security prices behave as if earnings are perceived to be dramatically different from a simple random walk process. Preliminary evidence also indicates that price-based forecasting models are more accurate than the random walk with a drift model.     

Some further theoretical and empirical implications regarding the relationship between earnings,dividends and stock prices

In this paper earnings, dividends and stock prices are modelled within a plausible economic framework. The first stage in the analysis involves characterization of the dynamic behavior of earnings, evidence was found for mean reverting behavior in the long term, and weaker evidence for mean reversion in the short term. The relationship between dividends and earnings is then examined using a modified form of the Lintner model. The empirical results suggest the modified formulation performs as effectively as the original Lintner approach. Using these findings, we then develop the functional form of the corresponding share price relationship. As a consequence of using a generalized model for earnings we are able to examine theoretically, the effect of different earnings processes on share price behavior. The empirical results imply that changes in earnings per share and earnings per share are important in explaining returns.     

The Predictive Ability of Dividend and Earnings Yields for Long-Term Stock Returns

We use empirical models to examine the predictive ability of dividend and earnings yields for long‐term stock returns. Results show that dividend and earnings yields share a similar predictive power for future stock returns and growth. We find that the predictive power of dividend yields increases with the return horizon, but that yields forecast future returns and growth over a much longer horizon. Finally, dividend and earnings yields exhibit high autocorrelation and strong contemporaneous relations.     

The non-linear relationship between oil prices and stock prices: Evidence from oil-importing and oil-exporting countries

This paper investigates the long-run dynamics between stock and oil prices over the period from March 13, 2001 to August 25, 2017 using the Rafailidis and Katrakilidis (2014) approach, which includes the structural breaks in the relationship between the variables in a Dynamic Ordinary Least Squares model. The approach verifies the existence of cointegration and asymmetry. The main results indicate that when using nonlinear approaches, we can find cointegration and asymmetry. For oil-exporting countries, a positive long-term relationship was found between oil and stock prices. In this case, the wealth effect prevailed for these countries. For oil-importing countries with developed economies, a negative signal was found, confirming that in these economies the business cost channel prevailed. However, oil-importing countries with emerging economies have experienced a positive sign in the long-term relationship, probably due to the economic cycle. In addition, only the United States has seen asymmetric adjustments in the long-term relationship between oil and stock prices.     

ON THE FUNCTIONAL FORM OF EARNINGS AND STOCK PRICES: INTERNATIONAL EVIDENCE AND IMPLICATIONS FOR THE E/P ANOMALY

This paper examines the functional form of earnings and stock prices on US and Finnish stock markets. Although the functional specification of the components of financial ratios based on purely accounting numbers has received considerable attention, the functional form of earnings and stock prices has not been investigated carefully enough. This investigation is, however, important because of the common use of E/P ratio in financial statement analysis. The empirical evidence provided by this study indicates that the proportional relationship between earnings and stock prices is rejected in both countries. In addition, it is discovered that this deviation from proportionality is a major factor producing the so-called E/P anomaly in these two countries.     

Commodity Prices and Stock Market Behavior in South American Countries in the Short Run

Using Geweke feedback measures, we present empirical evidence that largely supports the hypothesis that the stock markets of South American countries are highly affected by changes in commodity prices after controlling for changes in exchange rates, interest rates, and North American stock market changes. In total, six different Goldman Sachs commodity price indexes are tested against the unexplained variation in stock market returns for Argentina, Brazil, Chile, Colombia, Peru, and Venezuela, covering the period 1995-2007. The Argentinian, Brazilian, and Peruvian stock markets are significantly affected by changes in commodity prices the same day. Venezuela's stock market, however, does not react to changes in commodity prices, even including energy prices. Stock market returns for Chile show a contemporaneous relation with energy and metals prices, whereas Colombia's equity market is affected by price changes for agricultural and industrial metals. In all cases, we find a contemporaneous relation and no indication of a lead or lag relationship.     

Long‐Term Evidence on the Effect of Aggregate Earnings on Prices

We examine the time‐series properties and determinants of the relation between aggregate earnings information and stock prices (aggregate earnings response coefficient or AERC) employing return decompositions with data since 1871. We confirm that AERC is negative even though firms respond positively to individual firm earnings information, but we also find that AERC is time varying. Furthermore, we show that AERC components based on expected earnings, cash flows, and discount rates are also time varying and differ in relative importance.     

我国上市公司盈余管理对股价影响的实证分析

盈余管理在西方被称为“市场参与者的游戏”,近年来日益受到我国会计学界的关注。证券市场的迅速发展要求上市公司提供高质量的会计信息,由于盈余管理与会计信息质量关系密切,使得对上市公司盈余管理问题的研究成为投资者、债权人、政府主管部门以及会计准则制定机构关注的重点。另一方面,证券市场经验数据证明,股价的波动也同盈余管理密切相关,而利益相关者很可能利用盈余管理手段来影响股价从而获取利益。因此,加强我国上市公司盈余管理和股价相关性的研究,对提高上市公司会计信息质量和改善证券市场资源优化配置功能有着重要意义。本文运用实证分析方法,选取了竞争性强的家电行业和竞争性弱的石油行业的上市公司,从盈余管理度量着手,研究竞争性不同行业的上市公司盈余管理对股价的影响大小,并对投资者的行为提出相关建议。     

Predictability and the earnings–returns relation

This paper studies the effects of predictability on the earnings–returns relation for individual firms and for the aggregate. We demonstrate that prices better anticipate earnings growth at the aggregate level than at the firm level, which implies that random-walk models are inappropriate for gauging aggregate earnings expectations. Moreover, we show that the contemporaneous correlation of earnings growth and stock returns decreases with the ability to predict future earnings. Our results may therefore help explain the apparently conflicting recent evidence that the earnings–returns relation is negative at the aggregate level but positive at the firm level.     

The long-run relationship between stock prices and goods prices: New evidence from panel cointegration

We examine the long-run relationship between stock prices and goods prices to gauge whether stock market investment can hedge against inflation. Data from 16 OECD countries over the period 1970–2006 are used. We account for different inflation regimes with the use of sub-sample regressions, while maintaining the power of tests in small sample sizes by combining time-series data across our sample countries in a panel unit root and panel cointegration econometric framework. The evidence supports a positive long-run relationship between goods prices and stock prices with the estimated goods price coefficient being in line with the generalized Fisher hypothesis.