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Decomposing the earnings-to-price ratio and the cross-section of international equity-index returns

Umutlu, Mehmet; Bengitöz, Pelin; Zaremba, Adam


Pelin Bengitöz

Adam Zaremba


We examine whether components of the earnings-to-price (EP) ratio can be used to extract incremental information to better estimate future returns in the cross-section of country-industry indexes. We demonstrate that the EP components, such as lagged EP, changes in earnings, short-term momentum and long-term reversal in prices increase the accuracy of return forecasts. The EP decomposition matters in developed markets but is pointless in emerging countries. The results are robust to modifications in the methodology, sub-period analyses, the use of an alternative sample and remain unchanged after controlling for net share issuance, size, and fixed country and time effects.

Journal Article Type Article
Online Publication Date Jul 26, 2021
Publication Date Nov 20, 2021
Deposit Date Jan 29, 2023
Journal Applied Economics
Print ISSN 0003-6846
Electronic ISSN 1466-4283
Publisher Routledge
Peer Reviewed Peer Reviewed
Volume 53
Issue 54
Pages 6213-6230
Keywords International portfolio management, E/P decomposition, value effect, index-return predictability