Time-Varying Risk Premiums and the Output Gap

Posted: 22 Jun 2009

See all articles by Ilan Cooper

Ilan Cooper

BI Norwegian Business School

Richard Priestley

Norwegian Business School

Date Written: July 2009

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.

Keywords: E44, G12, G14

Suggested Citation

Cooper, Ilan and Priestley, Richard, Time-Varying Risk Premiums and the Output Gap (July 2009). The Review of Financial Studies, Vol. 22, Issue 7, pp. 2601-2633, 2009. Available at SSRN: https://ssrn.com/abstract=1422409 or http://dx.doi.org/hhn087

Ilan Cooper (Contact Author)

BI Norwegian Business School ( email )

Nydalsveien 37
Oslo, 0442
Norway

Richard Priestley

Norwegian Business School ( email )

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

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