Predicting Equity Returns for 37 Countries: Gordon Formula

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Oliver
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Predicting Equity Returns for 37 Countries: Gordon Formula

Post by Oliver »

I hope you find this article interesting!

Oliver


Predicting Equity Returns for 37 Countries: Tweaking the Gordon Formula
Kenneth S. Reinker and Edward Tower
July 12, 2002
http://www.econ.duke.edu/Papers/Other/T ... eturns.pdf
Recently, there has been a lot of discussion about whether and how much the U.S. stock market is overvalued, leading some economic gurus to suggest that foreign markets may be good investments. We ask whether this is the case and apply the Gordon formula to predict future real rates of return on three Morgan Stanley Capital International indices
and 37 individual country indices. Our conclusion is that, as a whole, foreign markets doindeed promise significantly higher future returns than the U.S. market does, suggesting that an increased focus on international diversification by investors and fund managers
could be beneficial. JEL classification: G11 & G12.

.....
The essence of the Campbell- Shiller argument is that the S&P500 index is overvalued as compared with past history. We ask the same question in a cross section rather than in a time series context.
raddr
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Post by raddr »

Hi Oliver,

Nice link!



We think that Dimson, Marsh and Staunton (2002, p.208) make an important point.
They argue that when the prospective equity risk premium over fixed income securities is
low, as it is today, it makes sense for investors to make larger portfolio bets on securities
that appear to be mispriced and reduce the emphasis of their portfolios on broad market
exposure. We believe that the risk return payoff for broad investment in Canada or in the
S&P500 index is too unappealing to justify investment in them
, especially since there are
inflation protected Treasury bonds guaranteeing returns of more than 3 percent per year.


I couldn't agree more. :D
wanderer
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Post by wanderer »

especially since there are inflation protected Treasury bonds guaranteeing returns of more than 3 percent per year

last i saw, TIPS were at 2.5%. Not true?

I agree, nice link, oliver.
regards,

wanderer

The field has eyes / the wood has ears / I will see / be silent and hear
bpp
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Post by bpp »

Fascinating table.

Japan looks as bad as the S&P500 as of Jan. 2002. The best bet looks like Sweden :!:

I wonder if they'll update their table.

Cheers,
Bpp
peteyperson
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Re: Predicting Equity Returns for 37 Countries: Gordon Formu

Post by peteyperson »

It is interesting the William Bernstein has looked over this article too. It seems he's got quite a cottage industry going on reviewing other material on subjects he's familar with.

Petey
Oliver wrote: I hope you find this article interesting!

Oliver


Predicting Equity Returns for 37 Countries: Tweaking the Gordon Formula
Kenneth S. Reinker and Edward Tower
July 12, 2002
http://www.econ.duke.edu/Papers/Other/T ... eturns.pdf
Recently, there has been a lot of discussion about whether and how much the U.S. stock market is overvalued, leading some economic gurus to suggest that foreign markets may be good investments. We ask whether this is the case and apply the Gordon formula to predict future real rates of return on three Morgan Stanley Capital International indices
and 37 individual country indices. Our conclusion is that, as a whole, foreign markets doindeed promise significantly higher future returns than the U.S. market does, suggesting that an increased focus on international diversification by investors and fund managers
could be beneficial. JEL classification: G11 & G12.

.....
The essence of the Campbell- Shiller argument is that the S&P500 index is overvalued as compared with past history. We ask the same question in a cross section rather than in a time series context.
raddr
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Re: Predicting Equity Returns for 37 Countries: Gordon Formu

Post by raddr »

peteyperson wrote: It is interesting the William Bernstein has looked over this article too. It seems he's got quite a cottage industry going on reviewing other material on subjects he's familar with.


Petey,

Do you have a link for the Bernstein article?
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ataloss
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Post by ataloss »

We think that Dimson, Marsh and Staunton (2002, p.208) make an important point. They argue that when the prospective equity risk premium over fixed income securities is low, as it is today, it makes sense for investors to make larger portfolio bets on securities that appear to be mispriced and reduce the emphasis of their portfolios on broad market exposure.


I agree.

I wish they would update their numbers on the www as mentioned in the paper.

This seems to be the correct url (not the one in the article) but nothing new is posted/linked
http://www.econ.duke.edu/Econ/Faculty/Users/etower.html
Have fun.

Ataloss
peteyperson
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Re: Predicting Equity Returns for 37 Countries: Gordon Formu

Post by peteyperson »

Raddr,

Slight misunderstanding.

The author thanks several people for reviewing the manuscript, William Bernstein was one. Bernstein also mentioned that he was making a bit of a cottage industry of it, a bit to his chagrin. No idea which EF that was in but that was the substance of his comments. In that instance he was referring to reviewing a book on ETFs.

Petey
raddr wrote: Petey,

Do you have a link for the Bernstein article?
Oliver
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Post by Oliver »

ataloss wrote: I wish they would update their numbers on the www as mentioned in the paper.


Hello ataloss,

I emailed Tower asking if there are any updates. I am also interested in an update!

Oliver
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ataloss
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Post by ataloss »

I hope he emails back!!
Have fun.

Ataloss
wanderer
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Post by wanderer »

It's amazing who will respond. Bill Bernstein e-mailed me back in, like, 45 minutes on some question I had. I would like to see these numbers now, too. In the case of Q, the action was mainly in the numerator (price). GDP/earnings/intrinsic value changes much more slowly.
regards,

wanderer

The field has eyes / the wood has ears / I will see / be silent and hear
raddr
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Post by raddr »

ataloss wrote: I hope he emails back!!


Me too. I'm having trouble verifying his dividend growth rate for the EAFE index. Looks a tad optimistic to me. :?
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