Output and expected returns

This paper shows for 1929-2003 U.S. data and also for international G-7 data that the ratio of share prices to GDP tracks a large fraction of the variation over time in expected returns on the aggregate stock market, capturing more of that variation than do price-earnings and price-dividend ratios and often also providing additional information about excess returns. The price output ratio tracks long-term U.S. cumulative stock returns almost as well as the cay-ratio of Lettau and Ludvigson [2001a. Journal of Finance 56, 815-849, 2005. Journal of Financial Economics 76, 583-626], although the cay-ratio tracks variation in U.S. excess returns better. The price-output ratio, however, involves no parameter estimation and is easily constructed for non-U.S. countries. (c) 2006 Elsevier B.V. All rights reserved.