Short- and Long-Run Business Conditions and Expected Returns

46 Pages Posted: 14 Jan 2014 Last revised: 20 May 2014

See all articles by Qi Liu

Qi Liu

Peking University - Department of Finance

Libin Tao

University of International Business and Economics - School of Banking and Finance

Weixing Wu

University of International Business and Economics (UIBE)

Jianfeng Yu

Tsinghua University - PBC School of Finance

Date Written: May 12, 2014

Abstract

Numerous studies argue that the market risk premium is associated with economic conditions and show that proxies for business conditions indeed predict aggregate market returns. By directly estimating short- and long-run expected economic growth, we show that short-run expected economic growth is negatively related to future returns, whereas long-run expected economic growth is positively related to aggregate market returns. At an annual horizon, short- and long-run expected growth can jointly predict aggregate excess returns with an R-sqr of 17-19%. Our findings indicate that the risk premium has both high- and low-frequency fluctuations and highlight the importance of distinguishing short- and long-run economic growth in macro asset pricing models.

Keywords: business condition, expected stock return, business cycle, long-run, short-run

JEL Classification: G12

Suggested Citation

Liu, Qi and Tao, Libin and Wu, Weixing and Yu, Jianfeng, Short- and Long-Run Business Conditions and Expected Returns (May 12, 2014). Available at SSRN: https://ssrn.com/abstract=2378554 or http://dx.doi.org/10.2139/ssrn.2378554

Qi Liu

Peking University - Department of Finance ( email )

Beijing
China

Libin Tao

University of International Business and Economics - School of Banking and Finance ( email )

10, Huixin Dongjie
Changyang District
Beijing, Beijing 100029
China

Weixing Wu

University of International Business and Economics (UIBE) ( email )

10, Huixin Dongjie
Changyang District
Beijing, Beijing 100029
China

Jianfeng Yu (Contact Author)

Tsinghua University - PBC School of Finance ( email )

No. 43, Chengdu Road
Haidian District
Beijing 100083
China

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