Financial Investment Opportunities and the Macroeconomy

Abstract

This paper studies the relation between changes in financial investment opportunities and changes in the macroeconomy. States variables such as the lagged production growth rate, the default premium, the term premium, the short‐term interest rate and the market dividend‐price ratio are shown to be indicators of recent and future economic growth. Further, the market excess return is negatively correlated with recent economic growth and positively correlated with expected future economic growth. These results offer straightforward interpretations of recent evidence on the forecasts of the market excess return by state variable via their forecasts on the macroeconomy.

The relation between the equity risk premium and the bond maturity premium in the UK: 1900–2006

“…Second, regarding predictability, it is found that the lagged maturity premium is related with the equity premium only in the low volatility regime, thereby indicating regime-dependent predictability of the equity premium. Importantly, the predictability relation is positive, in line with previous evidence for the USA (Campbell 1987;Fama and French 1989;Chen 1991). This result is robust to an alternative definition of the equity risk premium in terms of the long term government yield (instead of the Treasury bill yield), and to the inclusion of the real interest rate and the real growth rate in the regime switching VAR as control variables.…”

Assessing the impact of oil prices on firms of different sizes: Its tough being in the middle

“…Consistent with the arbitrage pricing theory, increases in the market returns are expected to lead to increases in individual stock returns (see for example, Chen, 1991;Chen et al, 1986). Previous business cycle research has highlighted the importance of interest rates in explaining stock price movements (see for example, Chen, 1991;Chen et al, 1986).…”

“…Previous business cycle research has highlighted the importance of interest rates in explaining stock price movements (see for example, Chen, 1991;Chen et al, 1986). Positive term spreads are generally observed during periods of economic expansion and negative term spreads, which correspond to an inverted yield curve, are observed prior to periods of economic contraction.…”

Market Timing And Model Uncertainty: An Exploratory Study For The Swiss Stock Market

“…Nevertheless, recent advances in asset pricing theory seem to demonstrate that a certain degree of timevarying expected returns is necessary to reward investors for bearing certain dynamic risks associated with the business cycle. Loosely, it is claimed that the equity premium rises during an economic slow-down and falls during periods of economic growth, so that expected returns and business conditions move in opposite directions [see, e.g., FAMA and FRENCH (1989), CHEN (1991), FAMA (1991), andHARVEY (1991)]. However, certain aspects of the empirical research on stock market predictability remain controversial.…”