A Comparative Study Of The Predictive Capability Of PE And PB Ratio Of Macro-economy

Stock market prices are fluctuating rapidly and restlessly. Thesefluctuations reflect the changes in market sentiment and the expectationsof future. In developed economies, stock markets are regarded as aleading indicator of macroeconomic. In order to sort out the complexrelationship between market movements and macroeconomic, this paperwill focus on the average PE and PB indicators of the market and discusswhether they can effectively forecast macroeconomic information.Through theoretical analysis and formula derivation, the papersummarizes and explains the theoretical basis of why PE and PB indexesare capable of predicting information about future. Further, it explainswhat kind of expected economic information each index contains. Inorder to define macroeconomics in the next period, this paper employsfive major indicators, which are money supply growth, leading index, thegrowth rate of the total electricity consumption, the RMB NDF exchangerate against the U.S. dollar and the one-year Treasury bond yield.This paper runs a VAR empirical analysis of those indicators mentionedabove, using the data from January2000to October2012.The empirical results show that PE and PB ratios both can predict the macroeconomicinformation. However, PB ratio, in comparison, is more effective inpredictions. Based on these conclusions, we recommend investors to paymore attention to the research and analysis of PB ratio.