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The output gap and expected security returns
Author(s) -
Biswas Anindya
Publication year - 2014
Publication title -
review of financial economics
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.347
H-Index - 41
eISSN - 1873-5924
pISSN - 1058-3300
DOI - 10.1016/j.rfe.2014.04.001
Subject(s) - output gap , weighting , economics , potential output , econometrics , information gap , computer science , monetary economics , monetary policy , physics , acoustics , computer network , bridging (networking)
This paper analyzes the impact of the output gap on market excess returns. The output gap is usually defined as the deviation of output from potential output that is indicated by the trend output. However, this study departs from the common approach of calculating the output gap based on a simple trend line. It uses a flexible data‐driven weighting scheme, and it uses only the available information that corresponds to each forecasting origin to derive the output gap. Overall, the proposed output gap is a strong predictor of U.S. market excess returns.