Featured Research

from universities, journals, and other organizations

Better Predictions Of Share Yields

Date:
January 6, 2009
Source:
BI Norwegian School of Management
Summary:
It is not easy to predict stock market trends. Two financial researchers at BI Norwegian School of Management have identified a target indicator that can predict future return on shares.

It is not easy to predict stock market trends. Two financial researchers at BI Norwegian School of Management have identified a target indicator that can predict future return on shares.

It is by no means a simple matter to say anything with confidence about how the value of a share will develop over time. There is a varied menu of key figures and indicators that are used to consider various investment alternatives.

Not all such measures are equally accurate and it is far from certain that they have predictive value.

Some people, perhaps particularly corporate and financial journalists, have fun seeing whether the dartboard method gives better results than following the advice of the experts. And sometimes it does, too.

In search of better prognoses

Financial researchers all over the world have long been in search of indicators that can yield more reliable prophecies about future yields on the stock markets.

Associate Professor Ilan Cooper and Professor Richard Priestley of the Department of Financial Economics at BI Norwegian School of Management have now discovered a macroeconomic variable, the “output gap”, which can be used to predict stock market yields.

This indicator provides good predictions of future yield on shares within a time horizon right down to one month and up to five years. The longer the time horizon, the more reliable the prediction.

The output gap is a measure of the pressure in the economy and is calculated as a deviation from its long-term growth rate. The output gap fluctuates in step with the business cycle.

Cooper and Priestley have undertaken extensive tests of the output gap as an indicator of future yield on shares.

Among other things they have conducted statistical analyses of the yield in the stock markets of the G7 countries (France, Germany, Italy, Japan, the UK, the US and Canada) in the period from 1970 to 2005.

“The output gap can predict stock market returns in the G7 countries (for example the yield on the S&P 500 index in the USA) and expected additional yield in relation to risk-free interest rates”, conclude the financial researchers.

The macro indicator can also be used to predict future returns on US long-term bonds.

The journal is considered one of the three most reputable within the discipline of financial economics.

Higher expected return during recessions

When the economy is booming, the output gap will be positive, but negative in bad times.

In their study Cooper and Priestley found that expected returns are higher during recessions than during recovery.

“We show that investors are risk-averse during recessions. They want a higher risk premium to invest in shares rather than government bonds,” they say.

The study shows that the yield in the share market is closely related to the macroeconomic figure the output gap. Stock-market investors who calculate the output gap and use it to predict future earnings in the market will do better than those who do not use it, say the BI researchers. On the other hand, what they earn extra in bad times is a compensation for the higher risk.


Story Source:

The above story is based on materials provided by BI Norwegian School of Management. Note: Materials may be edited for content and length.


Journal Reference:

  1. Cooper, Ilan and Priestley, Richard. Time-Varying Risk Premiums and the Output Gap. The Review of Financial Studies, (in press)

Cite This Page:

BI Norwegian School of Management. "Better Predictions Of Share Yields." ScienceDaily. ScienceDaily, 6 January 2009. <www.sciencedaily.com/releases/2009/01/090105091524.htm>.
BI Norwegian School of Management. (2009, January 6). Better Predictions Of Share Yields. ScienceDaily. Retrieved September 16, 2014 from www.sciencedaily.com/releases/2009/01/090105091524.htm
BI Norwegian School of Management. "Better Predictions Of Share Yields." ScienceDaily. www.sciencedaily.com/releases/2009/01/090105091524.htm (accessed September 16, 2014).

Share This



More Computers & Math News

Tuesday, September 16, 2014

Featured Research

from universities, journals, and other organizations


Featured Videos

from AP, Reuters, AFP, and other news services

FBI Finishes $1 Billion Facial Recognition System

FBI Finishes $1 Billion Facial Recognition System

Newsy (Sep. 15, 2014) — The FBI announced it plans to make its Next Generation Identification System available to law enforcement, but some privacy advocates are worried. Video provided by Newsy
Powered by NewsLook.com
Microsoft to Buy 'Minecraft' Maker for $2.5B

Microsoft to Buy 'Minecraft' Maker for $2.5B

AP (Sep. 15, 2014) — Microsoft will acquire the maker of the long-running hit game Minecraft for $2.5 billion as the company continues to invest in its Xbox gaming platform and looks to grab attention on mobile phones. (Sept. 15) Video provided by AP
Powered by NewsLook.com
Manufacturer Prints 3-D Car In Record Time

Manufacturer Prints 3-D Car In Record Time

Newsy (Sep. 15, 2014) — Automobile manufacturer Local Motors created a drivable electric car using a 3-D printer. Printing the body only took 44 hours. Video provided by Newsy
Powered by NewsLook.com
What $2.5B Deal Could Mean For Microsoft, 'Minecraft'

What $2.5B Deal Could Mean For Microsoft, 'Minecraft'

Newsy (Sep. 15, 2014) — While Microsoft looks to be expanding its mobile business, the creators of "Minecraft" are stepping aside. Video provided by Newsy
Powered by NewsLook.com

Search ScienceDaily

Number of stories in archives: 140,361

Find with keyword(s):
 
Enter a keyword or phrase to search ScienceDaily for related topics and research stories.

Save/Print:
Share:  

Breaking News:
from the past week

In Other News

... from NewsDaily.com

Science News

Health News

Environment News

Technology News



Save/Print:
Share:  

Free Subscriptions


Get the latest science news with ScienceDaily's free email newsletters, updated daily and weekly. Or view hourly updated newsfeeds in your RSS reader:

Get Social & Mobile


Keep up to date with the latest news from ScienceDaily via social networks and mobile apps:

Have Feedback?


Tell us what you think of ScienceDaily -- we welcome both positive and negative comments. Have any problems using the site? Questions?
Mobile iPhone Android Web
Follow Facebook Twitter Google+
Subscribe RSS Feeds Email Newsletters
Latest Headlines Health & Medicine Mind & Brain Space & Time Matter & Energy Computers & Math Plants & Animals Earth & Climate Fossils & Ruins