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Short- and Long-Run Business Conditions and Expected Returns

Author

Listed:
  • Qi Liu

    (Department of Finance, Guanghua School of Management, Peking University, Be¼ing 100871, China)

  • Libin Tao

    (School of Banking and Finance, University of International Business and Economics, Be¼ing 100029, China)

  • Weixing Wu

    (PBC School of Finance, Tsinghua University, Be¼ing 100083, China)

  • Jianfeng Yu

    (PBC School of Finance, Tsinghua University, Be¼ing 100083, China; Department of Finance, University of Minnesota, Minneapolis, Minnesota 55455)

Abstract

Numerous studies argue that the market risk premium is associated with expected economic conditions and show that proxies for expected 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. In addition, 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. This paper was accepted by Neng Wang, finance .

Suggested Citation

  • Qi Liu & Libin Tao & Weixing Wu & Jianfeng Yu, 2017. "Short- and Long-Run Business Conditions and Expected Returns," Management Science, INFORMS, vol. 63(12), pages 4137-4157, December.
  • Handle: RePEc:inm:ormnsc:v:63:y:2017:i:12:p:4137-4157
    DOI: 10.1287/mnsc.2016.2552
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