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World output gap and global stock returns

Victoria Atanasov

Journal of Empirical Finance, 2018, vol. 48, issue C, 181-197

Abstract: This paper shows that world output gap exhibits substantial in-sample and out-of-sample predictive power for global excess stock market returns. High world output gap today signals low expected returns in the future, consistent with a countercyclical equity risk premium. In contrast to the global economic growth which influences returns only at the end of the year, world output gap reveals stable and significant predictability all over the calendar year. Also, world output gap contains important predictive elements for local stock markets and often captures a larger fraction of return variation than the national output gap. Both cash-flow and discount-rate channels strongly reinforce the forecasting power of the world output gap.

Keywords: World output gap; Global stock returns; Predictability (search for similar items in EconPapers)
JEL-codes: G12 G14 G15 (search for similar items in EconPapers)
Date: 2018
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Journal of Empirical Finance is currently edited by R. T. Baillie, F. C. Palm, Th. J. Vermaelen and C. C. P. Wolff

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Handle: RePEc:eee:empfin:v:48:y:2018:i:c:p:181-197