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Ilan Cooper, Richard Priestley, Time-Varying Risk Premiums and the Output Gap, The Review of Financial Studies, Volume 22, Issue 7, July 2009, Pages 2801–2833, https://doi.org/10.1093/rfs/hhn087
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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.
© Oxford University Press 2008
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