The equity risk premium and the low frequency of the term spread

Arbeitspapier

We extract cycles in the term spread (TMS) and study their role for predicting the equity risk premium (ERP) using linear models. The low frequency component of the TMS is a strong and robust out-of-sample ERP predictor. It obtains out-of-sample R-squares (versus the historical mean benchmark) of 1.98% and 22.1% for monthly and annual data, respectively. It forecasts well also during expansions and outperforms several variables that have been proposed as good ERP predictors. Its predictability power comes exclusively from the discount rate channel. Contrarily, the high and business-cycle frequency components of the TMS are poor out-of-sample ERP predictors.

Angaben zum Objekt

• ISBN: 978-952-323-219-8
• Sprache: Englisch

Verweise und Beziehungen

• Erschienen in: Series: Bank of Finland Research Discussion Papers ; No. 7/2018

Klassifikation und Themen

• Klassifikation: Wirtschaft ; Financial Econometrics ; Portfolio Choice; Investment Decisions ; Asset Pricing; Trading Volume; Bond Interest Rates ; Financial Forecasting and Simulation

Beteiligte, Orts- und Zeitangaben

• Ereignis: Geistige Schöpfung
• (wer): Faria, Gonçalo ; Verona, Fabio
• Ereignis: Veröffentlichung
• (wer): Bank of Finland
• (wo): Helsinki
• (wann): 2018

Weitere Informationen

• Handle: http://hdl.handle.net/10419/212415
• Letzte Aktualisierung: 10.03.2025, 11:42 MEZ