The predictive ability of the dividend-price ratio for future stock returns does not necessarily imply that dividend-price ratios predict future stock prices. Stock returns consist of both a capital gain and a dividend yield component, and we show that predictability of stock returns by lagged...

This paper employs a new methodology for measuring the contribution of growth and interest rate differentials to the half-life of deviations from Purchasing Power Parity (PPP). Our method is based on directly comparing the impulse response function of a VAR model, where the real exchange rate is...

We present evidence that the predictive ability of the yield spread for short-run inflation is related to its predictive ability for economic activity. In particular, an increase in the slope of the term structure predicts an increase in output growth and a decrease in inflation of equal...

The advent of the single currency within the European Union provides a natural experiment to measure how the cost of equity changes as globalization takes place. This is because the launch of the single currency has led to the elimination of currency-related restrictions on the composition of...

This paper shows that during the 1990s the process of gradual economic and monetary integration, which eventually led to EMU, also resulted in a reduction in the equity cost of capital. A similar reduction was not present in the three EU countries which chose not to enter the Eurozone. There was...

This paper aims at identifying the sources of the predictive power of the nominal yield spread for economic activity. For this purpose, we analyse the relationship between the yield spread and future GDP growth in an economy subject to three types of structural disturbances: Supply shocks,...