Output Gap Forecast For Stock Returns

Stock return forecasting has always been a hot issue in financial research,and more and more variables have been found to predict stock returns.In this paper,we study the relationship between stock returns and output gaps in this emerging market in China.We use the HP filtering method as a smoothing method to decompose industrial added value time series to obtain output gaps,and then use univariate predictive regression model to study The effect of the output gap on the forecast of China's stock returns.' The output gap is in line with the actual economic cycle activities,which can be characterized by changes in the economic cycle.The output gap has a statistically significant positive relationship with the industrial added value,the consumer price index,and the producer price index:the output gap becomes larger,meaning the economy During the boom period,industrial output,inflation,and production levels will rise.The output gap is closely related to inflation,the output gap is expanding,the economy is booming,the actual output has an upward impact on inflation,and the inflation is correspondingly larger.The risk premium hypothesis indicates that the inflation rate is high.Under the circumstance,the uncertainty of investors' holding of asset income will increase.As a rational economic investor,investors will increase the risk level of investment assets,resulting in an increase in risk premium and a higher discount rate.The current value is reduced,resulting in a lower stock price yield.Through Granger's test,we find that the change in output gap is the Granger cause of the change in stock market returns.Moreover,the empirical results show that the output gap has a strong predictive effect on stock returns;the output gap prediction model has smaller sample mean square error than the historical mean regression model,that is,the output gap also has an out-of-sample prediction.excellent results.The regression coefficient between the output gap and the stock return rate is significantly negative,which means that when the output gap is expanding,it means that the economy is in a prosperous period,the impact of the real economy brings the upward momentum of inflation,and the higher inflation increases the benefits.Uncertainty,the level of discount rate increases,future cash flow discounts decrease,and stock price returns decrease.We find that this emerging securities market in China can find similarities with developed mature markets such as the US:Cooper and Priestley(2009)found that the output gap has a strong predictive effect on stock returns in the sample and is long-term(long-horizon)has a better predictive effect;it is consistently superior to historical average earnings in out-of-sample predictions,and different out-of-sample prediction periods are selected,and the results are significant;and these results are in the United States,G7 countries(Italy,Mature markets in developed countries such as Canada,Germany,France,Japan,and the United Kingdom have been validated.By comparing the output gap with other variables,we find that the output gap is significantly better than other variables in terms of stock returns,such as dividend yield,inflation rate,producer price index,turnover rate,etc.Both the t value and R2 are smaller than the outputgap.By changing the parameters of each variable and testing the stability of the output gap,we find that the output gap has a strong ability to interpret the stock return rate.When some parameters are changed,the output gap remains a result of the expected return of the stock.A more consistent and stable explanation.At the same time,we combed the research results of other popular variables on stock returns,and found that the output gap is better than other popular variables in predicting the rate of return.Predictors such as dividend yield(DY),earnings-to-price ratio(EP),turnover rate(TO),inflation rate(CPI),and stock variance(SVR)did not show good results in out-of-sample forecasts.The mean squared prediction error of the output gap predictive regression model is smaller than the mean squared prediction error of the historical average return forecast,and the output gap has better off-sample prediction performance,which is more meaningful for real-time investment decisions of real-world investors.