Time-varying risk premiums and the output Gap

Ilan Cooper, Richard Priestley

Research output: Contribution to journalArticlepeer-review


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.

Original languageEnglish
Pages (from-to)2801-2833
Number of pages33
JournalReview of Financial Studies
Issue number7
StatePublished - 2009
Externally publishedYes

Bibliographical note

Publisher Copyright:
© 2008 The Author.


  • E44
  • G12
  • G14

ASJC Scopus subject areas

  • Accounting
  • Finance
  • Economics and Econometrics


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