Asset pricing literature contends that aggregate stock returns can be predicted by business cycle state variables. In this study, we compare the predictive power of three state variables in the context of consumption-based capital asset pricing model (CCAPMs): consumption growth, the consumption-wealth ratio, and the surplus consumption ratio in eight major equity markets in the world: Australia, Canada, France, Germany, Italy, Japan, the U.K. and the U.S. We find that both the consumption-wealth ratio and the surplus consumption ratio can predict future stock returns. In addition, the consumption-wealth ratio has much more predictive power for returns in the international markets than the surplus consumption ratio and consumption growth rate.
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