Title: Asset valuations and distributions of returns: Cross-country perspective
Authors: Yuriy Kitsul - Federal Reserve Board (United States) [presenting]
Stephanie Curcuru - Federal Reserve Board (United States)
Abstract: The aim is to investigate the relationship between asset valuations and the probability distributions of future asset price moves in domestic and foreign markets. We find that (1) elevated (subdued) valuations help explain probabilities (and in some cases magnitudes) of large equity price declines (increases) over medium term, (2) U.S. price-earnings (P-E) ratio carries incremental predictive information for explaining probabilities of large foreign equity price changes even after conditioning on foreign countries' own P-E ratios, and (3) U.S. P-E ratio appears to be at least as informative as the first principal component of P-Es of all the considered countries. The last two results echo the findings in the financial cycle literature on the global importance of financial conditions in the United States.