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Stock market returns, volatility, and future output

  • Hui Guo
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In this article, Hui Guo shows that, if stock volatility follows an AR(1) process, stock market returns relate positively to past volatility but relate negatively to contemporaneous volatility in Merton’s (1973) Intertemporal Capital Asset Pricing Model. The model helps explain the recent finding that stock market volatility drives out returns in forecasting real gross domestic product growth because the predictive power of returns is hampered by their positive correlation with past volatility. If the positive relation between returns and past volatility is controlled for, however, the author finds that volatility provides no additional information beyond returns in forecasting output in the post-World War II sample.

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Article provided by Federal Reserve Bank of St. Louis in its journal Review.

Volume (Year): (2002)
Issue (Month): Sep ()
Pages: 75-86

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Handle: RePEc:fip:fedlrv:y:2002:i:sep:p:75-86:n:v.84no.5
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  18. John H. Cochrane, 1988. "Production Based Asset Pricing," NBER Working Papers 2776, National Bureau of Economic Research, Inc.
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  20. Hui Guo, 2002. "Understanding the risk-return tradeoff in the stock market," Working Papers 2002-001, Federal Reserve Bank of St. Louis.
  21. Black, Fischer & Scholes, Myron S, 1973. "The Pricing of Options and Corporate Liabilities," Journal of Political Economy, University of Chicago Press, vol. 81(3), pages 637-54, May-June.
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