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.
Top international publication
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.
Cooper and Priestley present the results of their study in the article “Time-Varying Risk Premiums and the Output Gap”, published in the international journal The Review of Financial Studies.
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.
Cooper, Ilan and Priestley, Richard (2008): ”Time-Varying Risk Premiums and the Output Gap” (Forthcoming, published online on October 2, 2008), The Review of Financial Studies.
Audun Farbrot | alfa
How Strong Brands Translate into Money
15.11.2016 | Kühne Logistics University - Wissenschaftliche Hochschule für Logistik und Unternehmensführung
Demographic change depresses tax revenues
04.11.2016 | Fraunhofer-Institut für Angewandte Informationstechnik FIT
A multi-institutional research collaboration has created a novel approach for fabricating three-dimensional micro-optics through the shape-defined formation of porous silicon (PSi), with broad impacts in integrated optoelectronics, imaging, and photovoltaics.
Working with colleagues at Stanford and The Dow Chemical Company, researchers at the University of Illinois at Urbana-Champaign fabricated 3-D birefringent...
In experiments with magnetic atoms conducted at extremely low temperatures, scientists have demonstrated a unique phase of matter: The atoms form a new type of quantum liquid or quantum droplet state. These so called quantum droplets may preserve their form in absence of external confinement because of quantum effects. The joint team of experimental physicists from Innsbruck and theoretical physicists from Hannover report on their findings in the journal Physical Review X.
“Our Quantum droplets are in the gas phase but they still drop like a rock,” explains experimental physicist Francesca Ferlaino when talking about the...
The Max Planck Institute for Physics (MPP) is opening up a new research field. A workshop from November 21 - 22, 2016 will mark the start of activities for an innovative axion experiment. Axions are still only purely hypothetical particles. Their detection could solve two fundamental problems in particle physics: What dark matter consists of and why it has not yet been possible to directly observe a CP violation for the strong interaction.
The “MADMAX” project is the MPP’s commitment to axion research. Axions are so far only a theoretical prediction and are difficult to detect: on the one hand,...
Broadband rotational spectroscopy unravels structural reshaping of isolated molecules in the gas phase to accommodate water
In two recent publications in the Journal of Chemical Physics and in the Journal of Physical Chemistry Letters, researchers around Melanie Schnell from the Max...
The efficiency of power electronic systems is not solely dependent on electrical efficiency but also on weight, for example, in mobile systems. When the weight of relevant components and devices in airplanes, for instance, is reduced, fuel savings can be achieved and correspondingly greenhouse gas emissions decreased. New materials and components based on gallium nitride (GaN) can help to reduce weight and increase the efficiency. With these new materials, power electronic switches can be operated at higher switching frequency, resulting in higher power density and lower material costs.
Researchers at the Fraunhofer Institute for Solar Energy Systems ISE together with partners have investigated how these materials can be used to make power...
16.11.2016 | Event News
01.11.2016 | Event News
14.10.2016 | Event News
02.12.2016 | Medical Engineering
02.12.2016 | Agricultural and Forestry Science
02.12.2016 | Physics and Astronomy