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Global and country-specific business cycle risk in time-varying excess returns on asset markets

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  • Thomas Nitschka

Abstract

Deviations of national industrial production indexes from trend explain time variation in excess returns on the G7 countries' stock markets. This paper highlights that this finding is driven by a global, common component in the national production gaps. The global component is not a mirror image of the U.S. business cycle. Quite to the contrary, a "rest-ofthe-world" production gap explains time variation in U.S. stock market excess returns while the U.S.-specific production gap does not. However, both U.S.-specific and global gap components explain time-varying excess returns on U.S. bonds. The relative importance of the U.S.-specific risk gap increases with the maturity of bonds.

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Bibliographic Info

Paper provided by Swiss National Bank in its series Working Papers with number 2012-10.

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Length: 58 pages
Date of creation: 2012
Date of revision:
Handle: RePEc:snb:snbwpa:2012-10

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Keywords: bond return; business cycle risk; excess returns; industrial production; predictability; stock return;

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References

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  1. Thomas Nitschka, 2010. "International Evidence for Return Predictability and the Implications for Long-Run Covariation of the G7 Stock Markets," German Economic Review, Verein für Socialpolitik, Verein für Socialpolitik, vol. 11, pages 527-544, November.
  2. Lance A. Fisher & Graham M. Voss, 2004. "Consumption, Wealth and Expected Stock Returns in Australia," The Economic Record, The Economic Society of Australia, The Economic Society of Australia, vol. 80(251), pages 359-372, December.
  3. Erik Hjalmarsson, 2008. "Predicting global stock returns," International Finance Discussion Papers, Board of Governors of the Federal Reserve System (U.S.) 933, Board of Governors of the Federal Reserve System (U.S.).
  4. Bossaerts, Peter & Hillion, Pierre, 1999. "Implementing Statistical Criteria to Select Return Forecasting Models: What Do We Learn?," Review of Financial Studies, Society for Financial Studies, Society for Financial Studies, vol. 12(2), pages 405-28.
  5. Britta Hamburg & Mathias Hoffmann & Joachim Keller, 2005. "Consumption, Wealth and Business Cycles in Germany," CESifo Working Paper Series, CESifo Group Munich 1443, CESifo Group Munich.
  6. Adrien Verdelhan & Nicola Borri, 2010. "Sovereign Risk Premia," 2010 Meeting Papers, Society for Economic Dynamics 1122, Society for Economic Dynamics.
  7. John Cochrane, 2005. "Financial Markets and the Real Economy," NBER Working Papers 11193, National Bureau of Economic Research, Inc.
  8. Alvin Tan & Graham Voss, 2003. "Consumption and Wealth in Australia," The Economic Record, The Economic Society of Australia, The Economic Society of Australia, vol. 79(244), pages 39-56, 03.
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Cited by:
  1. Nitschka, Thomas, 2013. "The impact of (global) business cycle risk on the German and British stock markets: Evidence from the first age of globalization," Review of Financial Economics, Elsevier, Elsevier, vol. 22(3), pages 118-124.
  2. Pierdzioch, Christian & Risse, Marian & Rohloff, Sebastian, 2014. "The international business cycle and gold-price fluctuations," The Quarterly Review of Economics and Finance, Elsevier, Elsevier, vol. 54(2), pages 292-305.

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