Essays on empirical asset pricing
Item
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Title
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Essays on empirical asset pricing
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Identifier
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d_2009_2013:80c8ddaf0658:11364
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identifier
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11742
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Creator
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Zirek, Duygu,
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Contributor
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K. Ozgur Demirtas
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Date
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2012
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Language
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English
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Publisher
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City University of New York.
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Subject
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Finance | Economics | Aggregate Earnings | Diversification | Expected Stock Returns | International Markets | Synchronicity
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Abstract
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Essay 1. This paper examines the time-series predictability of aggregate stock returns in 20 emerging markets. In contrast to the aggregate-level findings in US, earnings yield forecasts the time-series of aggregate stock returns in emerging markets. We consider aggregate earnings not as normalizing variables for stock price but as predictive variables in their own right. Aggregate earnings themselves covary with the market returns, hence it is not just the mean reversion of stock prices that is responsible for the forecasting power of earnings yield. These results are robust across different estimation methods and after controlling for small sample bias and macroeconomic variables. We argue that due to high levels of fundamentals' co-movement in emerging markets, the information content of firm-level earnings (unsystematic earnings) about future cash flows is not fully diversified away at the market level. Relevant literature shows that firm-level earnings are positively correlated with expected returns in US and this positive relationship remains significant only at the less diversified industry- level but disappears at the highly diversified US market level. Emerging markets are significantly less diversified compared to US. This explains the strong and robust predictive power of aggregate earnings in emerging markets.;Essay 2. This paper examines the forecasting power of earnings yield and aggregate normalized earnings in world markets. 48 countries have been ranked according to the stock price synchronicity and diversification measures, obtained by utilizing daily firm-level data for each country. There is a statistically significant relationship between aggregate earnings and one quarter ahead expected stock returns for more synchronous and less diversified countries as opposed to less synchronous and more diversified countries. We argue that due to high levels of fundamentals' co-movement in highly synchronous and less diversified markets, the information content of firm-level earnings (unsystematic earnings) about future cash flows is not fully diversified away at the aggregate level. Our results remain robust after controlling for macro variables, such as consumer price index and discount rates.
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Type
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dissertation
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Source
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2009_2013.csv
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degree
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Ph.D.
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Program
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Economics
