Department of International Business Studies National Chi Nan University
Abstract:
Fama and French (1988) shown that the nancial variable which the prices normalized by the dividends can be used to catches the predictability over the time series on the aggre- gate stock return. This paper constructs a new variable which the prices normalized by the di erence of consumption with the labor income. We found this new macroeconomic variable captures more variation in aggregate stock return than dividend-price ratio of Fama and French (1988), the output-price ratio of Rangvid (2006), and the consumption- wealth ratio of Lettau (2001). This paper also nd that this new macroeconomic variable is also a good predictor of the out-of-sample in the long horizons.
