Time Varying Risk Premia and the Output Gap

48 Pages Posted: 4 May 2008

See all articles by Ilan Cooper

Ilan Cooper

BI Norwegian Business School

Richard Priestley

Norwegian Business School

Abstract

The output gap, a production based macroeconomic variable, is a strong predictor of US 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 US excess bond returns.

Keywords: return predictability, risk premia, output gap

JEL Classification: G12, G14, E44

Suggested Citation

Cooper, Ilan and Priestley, Richard, Time Varying Risk Premia and the Output Gap. Review of Financial Studies, Forthcoming. Available at SSRN: https://ssrn.com/abstract=1128107

Ilan Cooper

BI Norwegian Business School ( email )

Nydalsveien 37
Oslo, 0442
Norway

Richard Priestley (Contact Author)

Norwegian Business School ( email )

Nydalsveien
37
N-0442 Oslo, 0283
Norway
47 46410515 (Phone)

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