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 Microtechnology industry is hiring – positive developments of past years continue
09.04.2018 | IVAM Fachverband für Mikrotechnik

nachricht RWI/ISL-Container Throughput Index with minor decline on a high overall level
20.03.2018 | RWI – Leibniz-Institut für Wirtschaftsforschung

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: Lethal combination: Drug cocktail turns off the juice to cancer cells

A widely used diabetes medication combined with an antihypertensive drug specifically inhibits tumor growth – this was discovered by researchers from the University of Basel’s Biozentrum two years ago. In a follow-up study, recently published in “Cell Reports”, the scientists report that this drug cocktail induces cancer cell death by switching off their energy supply.

The widely used anti-diabetes drug metformin not only reduces blood sugar but also has an anti-cancer effect. However, the metformin dose commonly used in the...

Im Focus: New Foldable Drone Flies through Narrow Holes in Rescue Missions

A research team from the University of Zurich has developed a new drone that can retract its propeller arms in flight and make itself small to fit through narrow gaps and holes. This is particularly useful when searching for victims of natural disasters.

Inspecting a damaged building after an earthquake or during a fire is exactly the kind of job that human rescuers would like drones to do for them. A flying...

Im Focus: Topological material switched off and on for the first time

Key advance for future topological transistors

Over the last decade, there has been much excitement about the discovery, recognised by the Nobel Prize in Physics only two years ago, that there are two types...

Im Focus: Researchers develop method to transfer entire 2D circuits to any smooth surface

What if a sensor sensing a thing could be part of the thing itself? Rice University engineers believe they have a two-dimensional solution to do just that.

Rice engineers led by materials scientists Pulickel Ajayan and Jun Lou have developed a method to make atom-flat sensors that seamlessly integrate with devices...

Im Focus: Three components on one chip

Scientists at the University of Stuttgart and the Karlsruhe Institute of Technology (KIT) succeed in important further development on the way to quantum Computers.

Quantum computers one day should be able to solve certain computing problems much faster than a classical computer. One of the most promising approaches is...

All Focus news of the innovation-report >>>

Anzeige

Anzeige

VideoLinks
Industry & Economy
Event News

ICTM Conference 2019: Digitization emerges as an engineering trend for turbomachinery construction

12.12.2018 | Event News

New Plastics Economy Investor Forum - Meeting Point for Innovations

10.12.2018 | Event News

EGU 2019 meeting: Media registration now open

06.12.2018 | Event News

 
Latest News

New discoveries predict ability to forecast dementia from single molecule

12.12.2018 | Health and Medicine

CCNY-Yale researchers make shape shifting cell breakthrough

12.12.2018 | Physics and Astronomy

Pain: Perception and motor impulses arise in the brain independently of one another

12.12.2018 | Health and Medicine

VideoLinks
Science & Research
Overview of more VideoLinks >>>