Time-Varying Risk Premia and the Output Gap

39 Pages Posted: 26 Sep 2006

See all articles by Ilan Cooper

Ilan Cooper

BI Norwegian Business School

Richard Priestley

Norwegian Business School

Date Written: January 2007

Abstract

The output gap, a production based macroeconomic variable, is a strong predictor of stock and bond 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 at the one month horizon as well as at longer horizons, and out-of-sample. It is robust to a host of checks that have troubled previous research. It subsumes sentiment based predictors, lending support for efficient market explanations of the predictability of excess 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 (January 2007). EFA 2007 Ljubljana Meetings Paper, Available at SSRN: https://ssrn.com/abstract=932949 or http://dx.doi.org/10.2139/ssrn.932949

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)

Here is the Coronavirus
related research on SSRN

Paper statistics

Downloads
691
Abstract Views
2,027
rank
20,226
PlumX Metrics