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Growth and Development in the Global Economy

Edited by Harry Bloch

What are the forces behind the increasing globalization of economic life? How does globalization affect the functioning of national economies? What difficulties confront government policymakers in dealing with the global economy? These issues are addressed in this volume by leading specialists. The contributors present a range of unique and varied perspectives from which they consider aspects of the increasing integration of economic life, exploring implications for the functioning of domestic markets in a rapidly changing global economy. The result is a collection of insights that provide a framework for understanding globalization as an economic phenomenon.
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Chapter 7: Stock Returns and the State of the Economy: A Historical Perspective Using Very Long-run UK Data

Angela Black, Patricia Fraser and Garry MacDonald


Angela Black, Patricia Fraser and Garry MacDonald INTRODUCTION The last two decades have witnessed a ‘sea change’ in how finance specialists view the world. As Cochrane (1999) argues, long gone are the days when we thought that stock prices followed a random walk data generating process and future returns were unpredictable, and that the single-factor CAPM provided a valid explanation of why returns on some stocks were higher then others.1 There now exists a large and still increasing literature that provides evidence supporting the view that expected returns are predictable, particularly at long horizons (US studies include Levhari and Levy, 1977; Campbell, 1987; Handa et al., 1989 and 1993; and Kothari et al., 1995). Pogue and Solnik (1974), Fung et al. (1985), Corhay (1992) and Fraser and Groenewold (2001) consider European data, while Australian studies include those of Brailsford and Faff (1997) and Brailsford and Josev (1997). Financial variables such as the slope of the yield curve – the ‘comfort index’ – the return from the corporate bond minus the return from a safe bond – the ‘default spread’– and the price-dividend ratio, have all been shown to exhibit some return forecasting ability (for example, Campbell, 1987; Fama and French, 1989; Thomas and Wickens, 1993; Black et al., 1997 and Clare et al., 1998). Similarly, it is now widely accepted by financial economists that market movements are not the only source of risk facing investors but that there is a range of risk factors associated with expected returns such as size and bookto-market...

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