Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/212415 
Year of Publication: 
2018
Series/Report no.: 
Bank of Finland Research Discussion Papers No. 7/2018
Publisher: 
Bank of Finland, Helsinki
Abstract: 
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.
JEL: 
C58
G11
G12
G17
Persistent Identifier of the first edition: 
ISBN: 
978-952-323-219-8
Document Type: 
Working Paper

Files in This Item:
File
Size





Items in EconStor are protected by copyright, with all rights reserved, unless otherwise indicated.