Forum for Science, Industry and Business

Sponsored by:     3M 
Search our Site:


Better predictions of share yields

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.


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:

More articles from Business and Finance:

nachricht Blockchain Set to Transform the Financial Services Market
28.09.2016 | HHL Leipzig Graduate School of Management

nachricht Paper or plastic?
08.07.2016 | University of Toronto

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: New 3-D wiring technique brings scalable quantum computers closer to reality

Researchers from the Institute for Quantum Computing (IQC) at the University of Waterloo led the development of a new extensible wiring technique capable of controlling superconducting quantum bits, representing a significant step towards to the realization of a scalable quantum computer.

"The quantum socket is a wiring method that uses three-dimensional wires based on spring-loaded pins to address individual qubits," said Jeremy Béjanin, a PhD...

Im Focus: Scientists develop a semiconductor nanocomposite material that moves in response to light

In a paper in Scientific Reports, a research team at Worcester Polytechnic Institute describes a novel light-activated phenomenon that could become the basis for applications as diverse as microscopic robotic grippers and more efficient solar cells.

A research team at Worcester Polytechnic Institute (WPI) has developed a revolutionary, light-activated semiconductor nanocomposite material that can be used...

Im Focus: Diamonds aren't forever: Sandia, Harvard team create first quantum computer bridge

By forcefully embedding two silicon atoms in a diamond matrix, Sandia researchers have demonstrated for the first time on a single chip all the components needed to create a quantum bridge to link quantum computers together.

"People have already built small quantum computers," says Sandia researcher Ryan Camacho. "Maybe the first useful one won't be a single giant quantum computer...

Im Focus: New Products - Highlights of COMPAMED 2016

COMPAMED has become the leading international marketplace for suppliers of medical manufacturing. The trade fair, which takes place every November and is co-located to MEDICA in Dusseldorf, has been steadily growing over the past years and shows that medical technology remains a rapidly growing market.

In 2016, the joint pavilion by the IVAM Microtechnology Network, the Product Market “High-tech for Medical Devices”, will be located in Hall 8a again and will...

Im Focus: Ultra-thin ferroelectric material for next-generation electronics

'Ferroelectric' materials can switch between different states of electrical polarization in response to an external electric field. This flexibility means they show promise for many applications, for example in electronic devices and computer memory. Current ferroelectric materials are highly valued for their thermal and chemical stability and rapid electro-mechanical responses, but creating a material that is scalable down to the tiny sizes needed for technologies like silicon-based semiconductors (Si-based CMOS) has proven challenging.

Now, Hiroshi Funakubo and co-workers at the Tokyo Institute of Technology, in collaboration with researchers across Japan, have conducted experiments to...

All Focus news of the innovation-report >>>



Event News

#IC2S2: When Social Science meets Computer Science - GESIS will host the IC2S2 conference 2017

14.10.2016 | Event News

Agricultural Trade Developments and Potentials in Central Asia and the South Caucasus

14.10.2016 | Event News

World Health Summit – Day Three: A Call to Action

12.10.2016 | Event News

Latest News

Resolving the mystery of preeclampsia

21.10.2016 | Health and Medicine

Stanford researchers create new special-purpose computer that may someday save us billions

21.10.2016 | Information Technology

From ancient fossils to future cars

21.10.2016 | Materials Sciences

More VideoLinks >>>