Forum for Science, Industry and Business

Sponsored by:     3M 
Search our Site:

 

Better predictions of share yields

05.01.2009
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.

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.

Reference:

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
Further information:
http://www.bi.no

More articles from Business and Finance:

nachricht Mathematical confirmation: Rewiring financial networks reduces systemic risk
22.06.2017 | International Institute for Applied Systems Analysis (IIASA)

nachricht Frugal Innovations: when less is more
19.04.2017 | Fraunhofer-Institut für Arbeitswirtschaft und Organisation IAO

All articles from Business and Finance >>>

The most recent press releases about innovation >>>

Die letzten 5 Focus-News des innovations-reports im Überblick:

Im Focus: Physicists Design Ultrafocused Pulses

Physicists working with researcher Oriol Romero-Isart devised a new simple scheme to theoretically generate arbitrarily short and focused electromagnetic fields. This new tool could be used for precise sensing and in microscopy.

Microwaves, heat radiation, light and X-radiation are examples for electromagnetic waves. Many applications require to focus the electromagnetic fields to...

Im Focus: Carbon Nanotubes Turn Electrical Current into Light-emitting Quasi-particles

Strong light-matter coupling in these semiconducting tubes may hold the key to electrically pumped lasers

Light-matter quasi-particles can be generated electrically in semiconducting carbon nanotubes. Material scientists and physicists from Heidelberg University...

Im Focus: Flexible proximity sensor creates smart surfaces

Fraunhofer IPA has developed a proximity sensor made from silicone and carbon nanotubes (CNT) which detects objects and determines their position. The materials and printing process used mean that the sensor is extremely flexible, economical and can be used for large surfaces. Industry and research partners can use and further develop this innovation straight away.

At first glance, the proximity sensor appears to be nothing special: a thin, elastic layer of silicone onto which black square surfaces are printed, but these...

Im Focus: 3-D scanning with water

3-D shape acquisition using water displacement as the shape sensor for the reconstruction of complex objects

A global team of computer scientists and engineers have developed an innovative technique that more completely reconstructs challenging 3D objects. An ancient...

Im Focus: Manipulating Electron Spins Without Loss of Information

Physicists have developed a new technique that uses electrical voltages to control the electron spin on a chip. The newly-developed method provides protection from spin decay, meaning that the contained information can be maintained and transmitted over comparatively large distances, as has been demonstrated by a team from the University of Basel’s Department of Physics and the Swiss Nanoscience Institute. The results have been published in Physical Review X.

For several years, researchers have been trying to use the spin of an electron to store and transmit information. The spin of each electron is always coupled...

All Focus news of the innovation-report >>>

Anzeige

Anzeige

Event News

Clash of Realities 2017: Registration now open. International Conference at TH Köln

26.07.2017 | Event News

Closing the Sustainability Circle: Protection of Food with Biobased Materials

21.07.2017 | Event News

»We are bringing Additive Manufacturing to SMEs«

19.07.2017 | Event News

 
Latest News

Programming cells with computer-like logic

27.07.2017 | Life Sciences

Identified the component that allows a lethal bacteria to spread resistance to antibiotics

27.07.2017 | Life Sciences

Malaria Already Endemic in the Mediterranean by the Roman Period

27.07.2017 | Health and Medicine

VideoLinks
B2B-VideoLinks
More VideoLinks >>>