The output gap and expected security returns |
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Authors: | Anindya Biswas |
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Affiliation: | Division of Business, Spring Hill College, Mobile, AL 36608, United States |
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Abstract: | This paper analyzes the impact of the output gap on market excess returns. The output gap is usually defined as the deviation of output from potential output that is indicated by the trend output. However, this study departs from the common approach of calculating the output gap based on a simple trend line. It uses a flexible data-driven weighting scheme, and it uses only the available information that corresponds to each forecasting origin to derive the output gap. Overall, the proposed output gap is a strong predictor of U.S. market excess returns. |
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Keywords: | E44 G17 Market returns predictability Output gap Real‐time data MIDAS regression Beta‐weighting scheme |
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