Review of Financial Studies Vol. 22 No. 7 2009
Time-Varying Risk Premiums and the Output Gap
Abstract
The output gap, a production-based macroeconomic variable, is a strong predictor of U.S. stock returns. It is a prime business cycle indicator that does not include the level of market prices, thus removing any suspicion that returns are forecastable due to a “fad” in prices being washed away. The output gap forecasts returns both in-sample and out-of-sample, and it is robust to a host of checks. We show that the output gap also has predictive power for excess stock returns in other G7 countries and U.S. excess bond returns.
- DOI
- 10.1093/rfs/hhn087
- Volume
- 22
- Issue
- 7
- Pages
- 2801-2833
- Language
- en
- Sources
- openalex crossref