Swiss National Bank Working Papers

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1 01-10 Swss Naonal Bank Workng Papers Global and counry-specfc busness cycle rsk n me-varyng excess reurns on asse markes Thomas Nschka

2 The vews expressed n hs paper are hose of he auhor(s and do no necessarly represen hose of he Swss Naonal Bank. Workng Papers descrbe research n progress. Ther am s o elc commens and o furher debae. Copyrgh The Swss Naonal Bank (SNB respecs all hrd-pary rghs, n parcular rghs relang o works proeced by copyrgh (nformaon or daa, wordngs and depcons, o he exen ha hese are of an ndvdual characer. SNB publcaons conanng a reference o a copyrgh ( Swss Naonal Bank/SNB, Zurch/year, or smlar may, under copyrgh law, only be used (reproduced, used va he nerne, ec. for non-commercal purposes and provded ha he source s menoned. Ther use for commercal purposes s only permed wh he pror express consen of he SNB. General nformaon and daa publshed whou reference o a copyrgh may be used whou menonng he source. To he exen ha he nformaon and daa clearly derve from ousde sources, he users of such nformaon and daa are oblged o respec any exsng copyrghs and o oban he rgh of use from he relevan ousde source hemselves. Lmaon of lably The SNB acceps no responsbly for any nformaon provdes. Under no crcumsances wll accep any lably for losses or damage whch may resul from he use of such nformaon. Ths lmaon of lably apples, n parcular, o he opcaly, accuracy, valdy and avalably of he nformaon. ISSN (prned verson ISSN (onlne verson 01 by Swss Naonal Bank, Börsensrasse 15, P.O. Box, CH-80 Zurch

3 Global and counry-specfc busness cycle rsk n me-varyng excess reurns on asse markes Thomas Nschka 1 Swss Naonal Bank Absrac Devaons of naonal ndusral producon ndexes from rend explan me varaon n excess reurns on he G7 counres sock markes. Ths paper hghlghs ha hs fndng s drven by a global, common componen n he naonal producon gaps. The global componen s no a mrror mage of he U.S. busness cycle. Que o he conrary, a res-ofhe-world producon gap explans me varaon n U.S. sock marke excess reurns whle he U.S.-specfc producon gap does no. However, boh U.S.-specfc and global gap componens explan me-varyng excess reurns on U.S. bonds. The relave mporance of he U.S.-specfc rsk gap ncreases wh he maury of bonds. JEL: E3, F44, G15 Keywords: bond reurn, busness cycle rsk, excess reurns, ndusral producon, predcably, sock reurn 1 Malng address: Thomas Nschka, Moneary Polcy Analyss, Swss Naonal Bank, Börsensrasse 15, P.O. Box, CH-80 Zurch; Phone: +41-( ; FAX : +41 ( ; E-mal: [email protected] The paper benefed from commens and suggesons by Jonahan Benchmol (dscussan, an anonymous referee of he SNB workng paper seres as well as parcpans n a SNB Brown Bag Semnar, he BMC-QASS 01 conference on Macro and Fnancal Economcs, he 4 h IFABS conference and he 9 h GdE Annual Inernaonal Symposum on Money, Bankng and Fnance. Any errors and omssons are my own. The vews expressed n hs paper do no necessarly reflec he sance of he Swss Naonal Bank. 1

4 1 Inroducon Basc asse prcng heory suggess ha me seres and cross-seconal varaon n asse reurns should be relaed o macroeconomc rsk facors. In lne wh heory and earler evdence (see Cochrane (005 for an excellen survey of he leraure, Cooper and Presley (009 show ha he devaon of ndusral producon from rend (producon gap or oupu from rend (oupu gap predcs excess reurns on he U.S. sock and bond marke n- and ouof-sample. A negave producon gap predcs hgh excess reurns and vce versa. The nsample forecasng power of naonal producon gaps for naonal sock marke reurns perans also o he oher G7 counres. Ths laer fndng s parcularly neresng for a leas wo reasons. Frs, n conras o he producon gap, he record of oher purely macroeconomc forecas varables for sock marke reurns s raher mxed n nernaonal comparson. For nsance, shor-run varaon n he U.S. consumpon-wealh rao predcs U.S. sock marke reurns (Leau and Ludvgson, 001. Ths fndng also perans o consumpon-wealh raos of oher Anglo-Saxon counres (Fernandez-Corugedo e al., 003; Fsher and Voss, 004; Tan and Voss, 003; Ioanndes e al., 006 bu her German or Japanese counerpars do no predc he respecve German or Japanese sock marke excess reurns (Hamburg e al., 008; Nagayasu, 009. Second, he G7 counres ndusral producon gaps are sgnfcanly and posvely correlaed wh each oher. Correlaons of around 0.5 are common. Hence, a pror, s no clear f he predcve power of he naonal producon gaps s he oucome of common, global varaon n producon gaps or due o her counry-specfc dynamcs. Earler sudes hghlgh he mporance of global fnancal marke rsk facors as explanaon of naonal sock markes me varaon (e.g. Bekaer and Harvey, 1995; Campbell and Hamao, 199; Chan e al., 199; Dumas and Sonk, 1995; Ferson and Harvey, 1993; Harvey, angvd (006 scales sock prces wh GDP o show ha hs sock prce o GDP rao s a powerful predcor of sock marke reurns nernaonally. By consrucon, however, hs s no a purely macroeconomc varable. 1

5 1991. Moreover, Guo (006 and Nschka (010 provde evdence for he mpac of global, busness cycle relaed rsk on naonal sock markes by showng ha he U.S. consumponwealh-rao does no only predc U.S. bu also foregn sock marke reurns. ecenly, Cooper and Presley (01 show ha swngs n he world capal sock o oupu rao predc naonal sock marke reurns of developed counres n- and ou-of-sample. The man emprcal resuls of hs paper suppor he vew ha global macroeconomc rsk plays an mporan role for explanaons of me-varaon n expeced asse reurns. The evdence presened n hs paper reveals ha sock marke reurn predcably by naonal producon gaps s prmarly drven by common varaon n he producon gaps. The man fndngs of hs paper are robus o a range of conrols, hold across subsample perods, peran a dfferen forecas horzons, reman qualavely unalered when daa s measured a lower han he monhly frequency and are suppored n sascal ess of ou-of-sample predcably. Assessmens of he mporance of global rsks for me varaon n sock marke excess reurns have ypcally reled on regressons of foregn sock marke reurns on U.S. forecas varables so far. The predcve power of he U.S. varables has been nerpreed as evdence for he presence of a common componen n sock marke reurns (e.g. Campbell and Hamao, 199; Guo, 006; Nschka, 010. Ths paper dffers from hese sudes. I provdes drec evdence for he presence of global macroeconomc rsk drvng me varaon n sock marke reurns. Ths paper hus adds complemenary nsghs o Cooper and Presley (01 who reveal he explanaory power of world busness cycle flucuaons, measured n he world capal sock o oupu rao, on naonal sock marke reurns. The world capal sock o oupu rao, however, feaures also he U.S. capal sock o oupu rao whch could be a major drver of her resuls. The approach followed n hs paper allows o address such concerns. 3

6 Moreover, hs paper reveals ha foregn macroeconomc rsk s mporan n order o explan me varaon n excess reurns on he U.S. sock marke. To he bes of my knowledge, here has been lle evdence of he mpac of foregn macroeconomc rsk on U.S. sock marke rsk prema so far. I explo hs laer fndng o assess he relave mporance of global and counry-specfc rsk for he explanaory power of he U.S. producon gap for U.S. bond excess reurns oo. Ths paper fnds ha boh global and U.S.-specfc pars of he U.S. producon gap explan me varaon n U.S. bond excess reurns. Ths observaon echoes recen evdence by Dahlqus and Hasselof (011 who show ha boh global and local versons of he Cochrane and Pazzes (005 bond rsk facor smulaneously predc bond excess reurns n he US, UK, Germany and Swzerland. Despe evdence for he mporance of global rsk for naonal bond excess reurns (Borr and Verdelhan, 011; Cooper and Presley, 01; Ilmanen, 1995, counry-specfc macroeconomc dynamcs hence also play an mporan role n explanng bond excess reurns. Taken ogeher, he man fndngs of hs paper renforce he pon ha ruly global busness cycle rsk, no necessarly concdng wh U.S. macroeconomc rsk, s an mporan explanaon of me-varyng excess reurns on naonal asse markes. Ths s parcularly rue for sock markes bu he emprcal analyss of hs paper also shows ha global rsk s mporan o undersand dynamcs of bond excess reurns. However, he mpac of counryspecfc macroeconomc rsk s no neglgble n ha conex. Ths paper hus conrbues o recen sudes ha deal wh he queson f common (macroeconomc rsk facors drve dfferen asse markes (e.g. Asness e al., 011; Bansal and Shalasovch, 010; Bekaer e al., 009; Hasselof, 010; Kojen e al., 010; Verdelhan, 011. I s mporan o bear n mnd ha hs paper assesses he mporance of global vs. counryspecfc rsk embedded n one sngle macroeconomc forecas varable. Ths paper does no assess he general queson how srongly global or counry-specfc macroeconomc rsk affec me seres varaon n asse reurns. There s evdence ha global macroeconomc rsk plays 4 3

7 an mporan role n hs respec and hs paper suppors hs vew. Bu hs s no anamoun o sayng ha counry-specfc rsks play no role. A number of sudes provde evdence for he mporance of local rsk facors n asse reurns, especally n emergng markes. Examples nclude Bekaer (1995 and Harvey (1995 who show ha local facors are mporan when assessng he predcably of emergng sock marke s rsk prema or Bekaer e al. (007 who hghlgh he mporance of counry-specfc lqudy rsk n emergng counres sock marke reurns. The remander of he paper s srucured as follows. Secon provdes nformaon abou he daa employed n hs sudy as well as he calculaon of he producon gap. Secon 3 presens he economerc framework and he man emprcal resuls for he predcably of sock marke reurns. Secon 4 assesses he mpac of global and counry-specfc busness cycle rsk on U.S. bond excess reurns. Secon 5 concludes. The appendx addresses a more general pon and shows ha s approprae o neglec he poenal feedback of sock reurns on he real economy n he presen conex. Daa, defnon of producon gap and excess reurns Counry coverage and baselne sample perod The counres under sudy are Canada, France, Germany, Ialy, Japan, he UK and he US. The baselne sample perod runs from January 1970 o February 011. Due o lmed daa avalably, he sample perod for he U.S. bond predcably assessmen spans only he perod from January 1970 o December 003. Defnon of producon gap To calculae he producon gaps, I follow Cooper and Presley (009 and regress he naural logarhm of each of he G7 counres monhly and seasonally adjused ndusral producon ndexes from he IMF's Fnancal Sascs on a lnear and quadrac me rend,.e. p = α + βrend + γrend + ε 5 (1 4

8 n whch p represens he log ndusral producon ndex of counry a me, rend denoes a me rend and he resdual of hs regresson, ε, consues he producon gap as defned n Cooper and Presley ( The producon gap for counry, gap. Sock marke excess reurns ε, s henceforh denoed I use monhly reurns on he G7 counres MSCI gross sock ndexes,.e. ndexes ha assume dvdends are renvesed, denomnaed n local currency and monhly shor-erm neres raes from he IMF's Fnancal Sascs o calculae sock marke excess reurns. The logarhmc excess reurn s defned as he log sock marke reurn a he end of he monh mnus he shorerm neres rae a he end of he prevous monh, r f +1 r. The shor-erm neres raes are reasury bll raes for Canada, he UK and he U.S. and money marke raes for France, Germany, Ialy and Japan. They are obaned from he IMF s Inernaonal Fnancal Sascs. The sock marke ndex daa are freely avalable on All of he resuls presened n he subsequence reman unaffeced f I use prce ndexes,.e. ndexes whch assume ha dvdend paymens are no renvesed, or sock ndexes denomnaed n U.S. dollar nsead of local currences. Neher dvdend growh nor exchange rae changes are predcable by he producon gap varees consdered n hs paper. In addon, all of he resuls reman qualavely unaffeced f I consder real sock marke reurns nsead of excess reurns n he forecas regressons. These resuls are no presened bu avalable upon reques. U.S. bond excess reurns Annual U.S. bond excess reurns a he monhly frequency are obaned from borrowng a he one-year yeld on a one-year maury bond n a gven monh, buyng a longer-erm (wo o 3 Cooper and Presley (009 consder four dfferen defnons of an oupu gap for he U.S., bu for reasons of daa avalably focus on he one obaned from equaon (1 n her assessmen of he G7 counres. 6 5

9 fve years bond and sellng ha longer-erm bond afer one year,.e. he bond excess reurn obeys brx + = p p y ( N N 1 N where p sands for log bond prces, N denoes he maury of bonds n years and y s he log yeld on a bond obeyng y N N p =. Ths paper uses he Fama and Blss bond daa from he N CSP daabase as n Cochrane and Pazzes ( Term spreads I use erm spreads, he dfference beween long-erm governmen bond yelds and shor-erm raes (3-monh -blls or call money marke raes, as conrol varable n mulvarae forecas regressons. The source s agan he IMF s Inernaonal Fnancal Sascs. Dvdend-prce raos As addonal conrol varable, hs paper uses he counry-specfc dvdend-prce raos. I follow Fama and French (1988 and e.g. Goyal and Welch (008 and consruc for each counry he dvdend-prce rao by summng up monhly dvdends on he respecve MSCI sock ndex from he 1 monhs precedng monh. The log of dvdends mnus he log of he sock prce ndex a me s he dvdend-prce rao. The monhly dvdends are obaned from he oal reurn and sock prce ndexes of he counres under sudy. In each monh he dvdend for a gven counry s calculaed as dfference n he reurn on he oal reurn and he reurn on he respecve counry s prce ndex mes he prce ndex a he end of he prevous monh. 4 John Cochrane gracously makes hs daa publcly avalable on hs webse hp://faculy.chcagobooh.edu/john.cochrane/ 7 6

10 3 Economerc specfcaons and resuls of sock reurn predcably regressons Producon gaps of he G7 counres predc excess reurns on he respecve naonal sock markes (Cooper and Presley, 009. However, able 1 dsplays ha he parwse correlaons beween he G7 counres producon gaps for he me perod from 1970 o 011 are all posve, sascally sgnfcan and coeffcens of 0.5 or hgher are no uncommon. The predcve power of naonal producon gaps could hence be relaed o a common, global componen. [abou here Table 1] To evaluae hs hypohess, I run one-monh ahead, n-sample, forecas regressons of he excess reurns on he G7 counres sock markes on a res-of-he-world producon gap from each of he G7 counres perspecve. As a furher es of hs hypohess, I dsngush beween common and dosyncrac componens n naonal producon gaps and es he predcve ably of hese wo componens n he presence of he erm spread, anoher powerful predcor of sock marke excess reurns nernaonally (Hjalmarsson, 010, and he counry-specfc dvdend-prce raos. Secon 3.1 presens he correspondng resuls. In addon, I check wheher he resuls are robus across subsample perods and f hey hold when ncreasng he forecas horzon above one monh. Secons 3. and 3.3 provde hese resuls. Moreover, I assess f he resuls hold when he daa s measured a lower han he monhly frequency and he common componen n naonal producon gaps s drecly obaned from a prncpal componen analyss. Secons 3.4 and 3.5 presen hese resuls. Fnally, secon 3.6. assesses f he nformaon on he dfferen producon gap componens could have helped nvesors n real me nvesmen decsons,.e. ou-of-sample predcably. 8 7

11 3.1 In-sample forecas regressons: Common or dosyncrac rsk n naonal producon gaps? Ths secon provdes an assessmen of he hypohess ha he predcve power of producon gaps for excess reurns on he G7 sock markes n Cooper and Presley (009 s drven by common, busness cycle relaed rsk. Ths assessmen consss of wo pars Evdence from unvarae regressons The frs par of he assessmen proceeds n hree seps. Frs, I presen resuls from a rerun of he Cooper and Presley (009 one-monh ahead forecas regressons of he G7 counres sock marke excess reurns on naonal producon gaps,.e. r e, = + β gap α + ν (3 wh e r, he monhly excess reurn on one of he G7 sock markes and gap he respecve counres producon gap obaned from equaon (1. The forecas regresson follows Cooper and Presley (009 n usng he second lag of gap because ndusral producon ndex daa s ypcally publshed wh a lag,.e. he ndusral producon ndex daa for monh -1 s publshed n he mddle of he perod -1 o (see also Chen e al., Snce he sample n hs sudy covers fve addonal years of daa compared o Cooper and Presley (009 and ncludes he recen fnancal crss and he grea recesson, hs rerun serves as a robusness check f he predcve power of naonal producon gaps for naonal sock marke reurns sll holds. In a second sep, I consruc a res-of-he-world producon gap, defned as gap G7 1 = K K k = 1 gap k (4 where K= 7 and k denoes he G7 counres oher han counry and assess f hs res-of-heworld producon gap predcs excess reurns on he sock marke of counry,.e. r e, = G7 α + β gap + ν (5 9 8

12 In words, f, for example, represens Canada, hen he res-of-he-world producon gap s he arhmec average of he oher sx G7 counres producon gaps. I hen assess f hs average producon gap of he oher counres predcs he excess reurn on he Canadan sock marke. If represens France, hen he res-of-he-world producon gap s he average producon gap of he G7 counres excludng France, ec. In he hrd sep, I assess f he res-of-he-world producon gap could be replaced by he U.S. producon gap. Ths assessmen s movaed by fndngs of Campbell and Hamao (199 who show ha predcve varables of U.S. sock marke reurns also predc Japanese sock marke reurns and Guo (006 as well as Nschka (010 who provde evdence for he forecas power of shor-run varaons n he U.S. consumpon-wealh rao for foregn sock marke reurns. The forecas equaon hen akes he followng form: r e, α gap + ν US = + β (6 Table summarzes he resuls of hs frs assessmen. Column (I presens he esmaes from equaon (4, column (II gves he esmaes from equaon (5 and column (III dsplays he esmaes from equaon (6. Newey-Wes (Newey and Wes, 1987 correced -sascs appear below he esmaes n parenhess. Snce he gaps are generaed regressors and he sample sze of almos 500 monhly observaons does no guaranee ha asympoc dsrbuon heory apples, I follow Hoffmann (011 and addonally assess he sascal sgnfcance of he esmaes by regardng Valkanov (003 correced -sascs. Valkanov suggess o dvde he sandard -sasc by he square roo of he sample sze. Ths correced -sasc allows o address concerns abou he perssence of regressor and small sample bas. Ths s parcularly helpful for nference from long-horzon regressons when he mpac of perssen regressors more of a concern han n he curren regresson seup. Crcal values for hs sasc are obaned by generang normally dsrbued me seres n he sample sze and regressng hs arfcally generaed, heorecally sound,.e. unpredcable, seres on he gap varees. Even hough only Newey-Wes (1987 correced -sascs are repored, asersk n 10 9

13 he ables ndcaes ha he esmae s sgnfcan a 95% confdence level for boh Newey- Wes (1987 and Valkanov (003 correced -sascs. The sample perod runs from January 1970 o February 011. The resuls presened under column (I of able confrm ha he paern observed by Cooper and Presley (009 also holds n hs longer sample perod. In fac, he resuls are even sronger n erms of sascal sgnfcance. A negave naonal producon gap oday predcs posve excess reurns on he respecve naonal sock marke one monh ahead. The esmaes are sascally sgnfcan a he 95% confdence level for all of he G7 counres excep Canada. The naonal producon gaps explan beween 1% and % of he me varaon n sock marke excess reurns one-monh ahead. Is hs predcve power he reflecon of common, macroeconomc rsk? The esmaes under column (II of able gve some ndcave evdence whch suppors hs hypohess. For all of he G7 counres, wh he excepon of Ialy, he average producon gap of he oher sx G7 counres predcs he counry s sock marke excess reurn ha s excluded from he producon gap consrucon. Ineresngly, he res-of-he-world producon gap predcs he Canadan sock marke excess reurn whle he Canadan producon gap does no. Conversely, he Ialan producon gap predcs he respecve naonal sock marke excess reurn whle he res-of-he-world producon gap does no. Ths fndng suggess ha an dosyncrac componen n he Ialan producon gap s responsble for s forecas ably of sock marke excess reurns. I also noeworhy ha he U.S. sock marke reurn s predcable by he average producon gap of he oher sx G7 counres. So far here s ample evdence for he predcve power of U.S. varables for foregn sock marke reurns whch s ypcally nerpreed as evdence for he presence of a common, global drvng force of me varaon n sock markes (e.g. Campbell and Hamao, 199; Guo, 006; Nschka, 010. Campbell and Hamao (199 show ha U.S. fnancal marke varables ha explan me varaon n he U.S. sock marke reurn sgnfcanly predc Japanese sock marke reurns. By conras, 11 10

14 Japanese predcve varables, such as he dvdend-prce rao, do no raonalze me varaon n U.S. sock marke reurns. To he bes of my knowledge, here has been lle drec evdence for he predcably of U.S. sock marke reurns by foregn macroeconomc varables as of ye. Ths sudy flls hs gap. Ths laer observaon s relaed o he queson f he res-of-he-world producon gap s n fac drven by he U.S. producon gap and hus f he evdence presened so far reflecs he drec mpac of U.S. busness cycle condons. The esmaes from equaon (6 presened under column (III of able sugges ha hs s no he case. The U.S. producon gap alone has some explanaory power for he UK sock marke excess reurn bu no for excess reurns on he oher G7 counres sock markes. The evdence of predcably by he res-of-heworld producon gaps s hence unlkely a drec reflecon of he U.S. busness cycle. [abou here Table ] 3.1. Evdence from mulvarae regressons dsngushng common and dosyncrac producon gap componens The frs par of he assessmen f he predcve power of naonal producon gaps for naonal sock marke excess reurns reflecs common busness cycle rsk leaves he mpresson ha ndeed global rsk plays an mporan role n hs respec. The second par of he assessmen res o dsngush explcly beween common and dosyncrac macroeconomc rsks by decomposng he naonal producon gaps no one componen ha s perfecly correlaed wh he respecve res-of-he-world producon gaps and he orhogonal componen nerpreed as counry-specfc par of he producon gap. Therefore, I run he followng regresson gap = G7 α + β gap + ν (7 o oban he componen n producon gaps ha s perfecly correlaed wh he res-of-heworld producon gaps, β gap G 7 whch s henceforh denoed common, gap. The componen 1 11

15 ha s orhogonal o, ν + 1, s nerpreed as he dosyncrac componen and henceforh denoed do, gap. I use hese componens o provde furher evdence on he source of he predcve power of naonal producon gaps by runnng regressons on he common and dosyncrac producon gap componens alone and check also wheher he erm spread, he dfference n yelds ( n percenage pons p.a. on a long-erm governmen bond and a shor-erm rae, alers any of he conclusons drawn so far. Hjalmarsson (010 shows ha predcve varables consruced from neres raes, especally he erm spread, are more robus predcors of sock reurns han prce-earnngs or dvdend-prce raos nernaonally. Includng he naonal erm spreads should hence be a good and parsmonous robusness es of he producon gap componens explanaory power for me varaon n sock marke excess reurns n hs nernaonal conex. As an alernave conrol, I also consder he counry-specfc dvdend-prce rao. The forecas regressons obey r e, α β gap β gap + ν common, do, = (8 and ncludng he erm spread r e, α β gap β gap β s + ν common, do, = (9 or he dvdend-prce rao r e, common, do, = + β1 gap + β gap + β 3dp 1 α + ν (10 Table 3 summarzes he resuls. Column (I dsplays he esmaes from equaon (8. Column (II presens he esmaes from equaon (9. Column (III gves he esmaes from regresson (10. Newey-Wes (Newey and Wes, 1987 correced -sascs appear below he esmaes n parenhess. Agan, asersk denoes sgnfcance a he 95% level judged by Newey-Wes and Valkanov (003 correced -sascs a he same me. The sample perod runs from January 1970 o February 011. The resuls renforce he mpresson lef by he forecas regresson resuls presened n able. 13 1

16 Column (I of able 3 shows ha for all of he G7 counres, s he common componen n producon gaps,.e. ha componen ha s perfecly correlaed wh he average producon gap across he oher sx counres, ha forecass sock marke excess reurns. Agan Ialy s he only excepon. As conjecured before, s he dosyncrac componen n he Ialan producon gap ha explans me varaon n he Ialan sock marke excess reurn. Column (II of able 3 shows ha he man concluson remans unalered when akng he respecve counres erm spread as addonal predcve varable no accoun. The ncluson of he erm spread drves ou he sascal sgnfcance of he common producon gap s regresson coeffcen for Canada. All of he oher counres resuls do no change. The erm spread self does no explan he varaon of he sock marke excess reurns n he presence of he wo producon gap componens. Ths fndng should no be oo surprsng snce he erm spread and he producon gap should boh rack busness cycle relaed varaon n sock reurns (Cooper and Presley, 009. In he regressons presened above could eher be drven ou by he presence of he common or he dosyncrac producon gap componens dependng on he exen by whch naonal erm spreads are drven by counry-specfc or global macroeconomc dynamcs. Fnally, he resuls under column (III show ha conrollng for he log dvdend-prce rao does no aler any of he conclusons drawn above. In conras o he erm spread, he dvdend-prce rao leaves he sascal sgnfcance of he common componen n he Canadan producon gap unaffeced. The dvdend-prce rao self s no sgnfcanly explanng he sock marke excess reurns under sudy. Snce he erm spread seems o be beer sued as conrol n he forecas regressons, he subsequence of he paper makes no furher use of he dvdend-prce rao as conrol varable. [abou here Table 3] 14 13

17 3. Sock excess reurn forecas regressons: subsample analyss The resuls presened so far hghlgh ha a common componen n naonal producon gaps raonalzes her explanaory power for sock marke excess reurns one monh ahead. The gap, however, s measured as a devaon of an ndusral producon ndex from a lnear and a quadrac me rend over he full sample perod. I mgh be he case ha he man resuls depend on he parculares of he sample perod. A comparson of he nernaonal evdence provded n Cooper and Presley (009 and he rerun dsplayed n secon 3.1 could rase concerns n hs respec. The nernaonal evdence n Cooper and Presley (009 s less srong n erms of sascal sgnfcance han he reruns of her orgnal regressons presened n hs paper. Ths s ceranly due o he fac ha he Cooper and Presley (009 sample perod ends n 005 whereas hs paper ncludes fve addonal years of daa ncludng he grea recesson and hence a maeral devaon of ndusral producon n he G7 counres from rend. To gauge he mpac of he parcular sample perod on he man conclusons of hs paper, I spl he sample perod no wo halves. The frs subsample perod runs from January 1970 o June The second subsample spans he perod from July 1990 o February 011. I hen run equaon (1 o oban he producon gaps for he parcular subsample perod and rerun he forecas regresson (9 for he wo subsample perods. Table 4 summarzes he resuls. Panel A of able 4 provdes he forecas regresson resuls for he frs, early subsample perod. In erms of sascal sgnfcance of he common producon gap componen s predcve power he resuls are slghly weaker han for he full sample perod. For Canadan and Ialan sock marke excess reurns he common producon gap componen exhbs no sascally sgnfcan explanaory power. For France, he esmae s margnally nsgnfcan a he 90% confdence level. Tme varaon n Japanese, Brsh and Amercan sock marke excess reurns, however, appears o be sgnfcanly explaned by he common producon gap componen. The explanaory power of he respecve producon gap componens for hs 15 14

18 subsample perod s comparable wh ha over he full sample perod. Ths s also rue for German sock excess reurns bu only a he 90% confdence level accordng o he Valkanov (003 correced -sascs. In he case of Germany, he dosyncrac componen also reveals some explanaory power for me varaon n he naonal sock marke n hs early subsample perod. Panel B of able 4 dsplays he forecas regresson resuls for he more recen subsample perod. The sascal sgnfcance of he common producon gap componen s forecas ably for he German, French and Japanese sock marke excess reurns deeroraes o sgnfcance levels below 95%. By conras, he Canadan sock marke excess reurn urns ou o be sgnfcanly explaned by he common producon gap componen as do he Brsh and Amercan sock marke excess reurns. In hs subsample perod, boh he common and he dosyncrac producon gap componen sgnfcanly drve he Ialan sock marke. In sum, he parcular sample perod for whch he producon gap and s common and dosyncrac componen are calculaed ceranly maers. However, he general concluson ha he common componen n naonal producon gaps s a sgnfcan explanaory varable of me varaon n naonal sock marke excess reurns perans o boh subsample perods. [abou here Table 4] 3.3 Sock excess reurn forecas regressons: Long-horzon forecass Macroeconomcally founded predcors of sock marke reurns ypcally dsplay her greaes explanaory power a busness cycle frequency forecas horzons (e.g. Cooper and Presley, 009; Hoffmann, 011; Leau and Ludvgson, 001; Lusg and van Neuwerburgh, 005; Pazzes e al., 007; angvd, 006; Sanos and Verones, 006. Ths s also suggesed by heorecal models ha movae me-varyng excess reurns on sock markes wh mevaraon n rsk averson over he busness cycle (e.g. Campbell and Cochrane, 1999; Consanndes, 1990; Consanndes and Duffe, 1996; Heaon and Lucas, 000 a, b; Yogo,

19 Inference from long-horzon regresson esmaes should noneheless be nerpreed wh healhy scepcsm because he usual seup of hese regressons ncludes a relavely small sample sze, perssen regressors and concaenaed one-perod logarhmc reurns o oban long-horzon reurns. Valkanov (003 and he leraure surveyed heren provde an accoun of he poenal economerc pfalls n such a seng. However, Hodrck (199 shows ha relavely lle bu sgnfcan predcve power n he shor erm s conssen wh a large amoun of predcably a long forecas horzons. Hence, he one-monh ahead forecas regressons already provde he proof of he n-sample forecas ably of he common producon gap componens. The one-monh regressons have also aken no accoun ha he regressors are generaed n a frs sage. Ths secon herefore uses long-horzon forecass prmarly o assess f he mporance of he common or dosyncrac producon gap componens changes wh he forecas horzon. I assess hs ssue hrough he followng regresson e,, h common,, h do, r, + h = + β1 gap + β gap + ν, + h α (11 where e r, h, + s he log sock marke excess reurn of counry over he forecas horzon h. The forecas horzon s n monhs. Table 5 summarzes he resuls for forecas horzons of 1, 4 and 36 monhs. Newey-Wes (Newey and Wes, 1987 correced -sascs appear below he esmaes n parenhess and he asersk denoes sgnfcance a 95% confdence level by boh Newey-Wes and Valkanov (003 correced -sascs. The sample perod runs from January 1970 o February 011. Furhermore, snce no only poenal bas n he sandard errors of he esmaes bu also n he esmaes hemselves makes nference from long-horzon regressons dffcul, hs paper also provdes long-horzon esmaes and sascs mpled by he onemonh ahead regresson under he null of no predcably (Boudoukh e al., 008. Boudoukh e al. (008 emphasze ha he paern n pon esmaes and ha are ypcally repored n long-horzon regressons are perfecly conssen wh he vew ha here s no reurn 17 16

20 predcably a all. They show ha pon esmaes a forecas horzon k mpled by acual 1 one-perod coeffcens, ˆβ, and he auocorrelaon of a gven regressor, ρ, under he null of no predcably obeys ˆ k ˆ ρ(1 ρ ( β β 1 β 1 ρ E = + k 1 1 ˆ 1 (1 and he sasc accordngly 1 k (1 ρ ρ E( k 1 ρ = k 1 (13 I repor hese sascs n able 5 under he headng mpled esmaes. The long-horzon forecass reveal wo major nsghs. Frs, n lne wh heory and earler evdence, he predcve power of he producon gap componens ncreases wh he forecas horzon. A he 36-monh horzon almos 30% of he me varaon n he French and Japanese sock marke excess reurns s explaned by he common producon gap. For he oher counres he explanaory power ranges beween 1% and 17% a ha horzon. Second, s he common producon gap componen ha drves he predcve power of producon gaps a all forecas horzons. The mporance of he dosyncrac componen for he Ialan sock marke reurn vsble n able 3 vanshes n he long-horzon forecass. The sandard error correcons (Valkanov, 003 and he mpled esmaes under he null of no predcably (Boudoukh e al., 008 mos of he me delver a conssen pcure wh regard o he sgnfcance of he long-horzon esmaes. Consder e.g. France a he 4-monh and a he 36-monh forecas horzon. A he 4-monh horzon, he convenonal Newey-Wes correced -sascs leave he mpresson of sgnfcan predcably of he common producon gap. However, he Valkanonv-correced -sascs sugges he oppose as do he mpled esmaes accordng o Boudoukh e al. (008. The pon esmaes and he mpled 18 17

21 esmaes under he null of no predcably are very smlar. Ths pcure changes, however, when we regard he French sock marke excess reurn a he 36-monh forecas horzon. A hs horzon, here appears o be sgnfcan explanaory power of he respecve common producon gap componen accordng o he correced -sascs as well as accordng o a comparson of he acual wh he mpled pon esmaes. [abou here Table 5] 3.4. Sock excess reurn forecas regresson: quarerly frequency The evdence presened so far reles on daa measured a he monhly frequency. However, macroeconomc daa such as he ndusral producon gaps examned n hs paper s ypcally used o make nference a quarerly or lower frequences. Ths secon presens resuls from one-perod ahead forecas regressons of quarerly sock excess reurns on he res-of-heworld producon gaps as n equaon (5. These resuls corroborae he monhly frequency forecas regressons. esuls from unvarae regressons are presened n he lef column of able 6. In addon, hs secon akes no accoun earler evdence by Guo (006 and Nschka (010 who show ha shor-run varaons n he US consumpon-wealh rao, cay, do no only explan me varaon n excess reurns on he US sock marke (Leau and Ludvgson, 001 bu also on foregn sock markes. 5 The resuls from mulvarae regressons of naonal sock marke reurns on he res-of-he-world producon gaps and cay are summarzed n he rgh column of able 6. The sample perod for hese regressons runs from he frs quarer of 1970 o he fourh quarer of 010. The unvarae forecas regresson resuls show ha he res-of-he-world producon gap s a sgnfcan predcor of naonal sock marke reurns a he quarerly frequency. The evdence suppors he man concluson of hs paper and s very smlar o he evdence provded for 5 Marn Leau gracously makes he U.S. cay daa publcly avalable on hs webse. A he me I downloaded hs daase ended n he second quarer of 010. I updaed hs daa unl he fourh quarer of 010 as descrbed n Leau and Ludvgson (

22 daa a he monhly frequency. A common componen n ndusral producon gaps explans me varaon n sock marke reurns. Agan Ialy s he excepon among he G7 counres. The explanaory power of he res-of-he-world producon gaps for quarerly sock excess reurns ranges from 3% o 11% for he UK. Ths general concluson prevals when addonally conrollng for cay. Only for U.S. sock marke excess reurns does cay exhb predcve power n excess of he res-of-he-world producon gap. The sasc, adjused for he number of regressors, mproves slghly. The bulk of predcably seems o come from he producon gap n hs seng. However, he fac ha boh varables are sascally sgnfcanly explanng me-varyng U.S. sock marke reurns suggess ha boh conan valuable nformaon abou he U.S. sock marke reurn. In addon, he correlaons beween cay and he respecve res-of-he-world producon gaps vares beween -0. and -0.3 (no repored n ables bu avalable upon reques. I could be he case ha he wo macroeconomc varables capure smlar dmensons of global, busness cycle relaed rsk such ha one varable s drvng ou mos of he sascal sgnfcance of he oher n he regressons presened n able 6. [abou here Table 6] 3.5 Sock excess reurn forecas regresson: Prncpal componens n producon gaps Ths secon addresses wo poenal concerns abou he evdence presened so far. Frs, he resuls hghlghng he mporance of a res-of-he-world producon gap for me varaon n sock marke excess reurns rely on he use of an arhmec average of naonal producon gaps. Ths averagng underles he assumpon ha all producon gaps are equally affecng common varaon n producon gaps. Ths s no necessarly rue. Second, I refer o hose componens of naonal producon gaps ha are perfecly correlaed wh he average producon gap of he oher sx G7 counres as common componens. These componens are obaned from regressons of he naonal oupu gaps on he respecve res-of-he-world 0 19

23 producon gaps. I mgh be useful o evaluae a more drec way o oban a ruly common componen n naonal producon gaps. For hese wo reasons I apply prncpal componen analyss o he naonal producon gaps of he G7 counres..e. denfy hose componens ha drve he common varaon n producon gaps. Table 7 presens he loadngs of he orgnal varables, he naonal oupu gaps, on hese prncpal componens. The las row of able 7 ndcaes how much of he common varaon n he naonal oupu gaps s explaned by he respecve prncpal componen. As can be seen from able 7, he wo frs prncpal componens explan abou 80% of he common varaon. The frs prncpal componen looks lke he bes canddae of a common componen n producon gaps ha could be responsble for he Cooper and Presley (009 resuls. emember ha all naonal oupu gaps predc sock reurns wh he same sgn. Only he loadngs on he frs prncpal componen have he same sgn. In addon, he loadngs are of smlar sze such ha akng an arhmec average,.e. assgnng equal weghs, of naonal producon gaps o oban a common componen seems jusfed. In fac, he arhmec average of naonal producon gaps s almos perfecly posvely correlaed wh he frs prncpal componen. [abou here Table 7] Is he frs prncple componen also an explanaory varable for me varaon n sock marke excess reurns? The answer ha he regresson esmaes of able 8 provde s yes. Table 8 presens resuls from he followng regresson r e, 1 = + β1 PC α + ν (14 where PC 1 denoes he frs prncpal componen of he G7 naonal producon gaps. The sample perod runs from January 1970 o February 011. Newey-Wes correced -sascs appear n parenhess and he asersk denoes sgnfcance a 95% confdence level by boh Newey-Wes and Valkanov correced -sascs. 1 0

24 Apar from he magnude of he regresson coeffcens, he evdence provded n able 8 s very smlar o forecas regresson esmaes on he respecve res-of-he-world producon gaps as under column II of able. Agan he Ialan sock marke excess reurn s no sgnfcanly explaned by he frs prncpal componen of he naonal producon gaps. The frs prncpal componen s explanaory power ranges from 1% o 3% for he oher G7 counres monhly sock marke reurns. In addon, s a sascally sgnfcan explanaory varable a convenonal sgnfcance levels. In sum, he resuls of hese regressons corroborae he man fndngs of hs paper. Ths subsecon, n parcular, also corroboraes he man conclusons of Cooper and Presley (01 who show ha he world capal sock o oupu rao predcs naonal sock marke reurns. The frs prncpal componen of producon gaps s concepually close o her proposed global, macroeconomc varable as also aggregaes all he busness cycle relaed nformaon of he counres under sudy,.e. also of ha counry whose sock marke reurn one would lke o predc. [abou here Table 8] 3.6 Is he nformaon abou common producon gap componens exploable for nvesors? So far, hs paper has focused on n-sample predcably regressons. Informaon from he whole sample perod has been used o calculae producon gaps and her respecve counryspecfc and common componens. Ths secon assesses he relave mporance of common and dosyncrac producon gap componens n sascal ess of ou-of-sample predcably. Ou-of-sample predcably s a queson of sll nensve debae as e.g. Bossars and Hllon (1999 or Goyal and Welch (008 show ha n-sample predcably does no ranslae no ou-of-sample predcably. By conras, Campbell and Thompson (008 sress ha many predcve varables can bea he hsorcal mean of sock excess reurns n ou-of-sample predcably ess once heorecally movaed resrcons on he sgn of coeffcens or 1

25 reurn forecass are mposed. In addon, hey show ha small ou-of-sample predcably can ranslae no economcally szeable uly gans for mean-varance opmzng nvesors. Ths paper assesses he queson of ou-of-sample predcably by calculang he producon gap as devaon of he respecve counres log ndusral producon ndex value a me from s one-sded Hodrck-Presco flered rend. 6 The one-sded Hodrck-Presco fler esmaes he rend n he log ndusral producon ndex eravely and hus only uses nformaon avalable up o me o forecas reurns n +1. However, due o he lack of vnage daa, hs s no really a real-me esmae snce he ndusral producon ndex seres employed n hs paper have been subjec o ex pos revsons. The forecas perod runs from January 1990 o February 011. I use he perod from January 1970 o December 1989 o calculae he devaons of ndusral producon ndexes from her Hodrck-Presco flered rends and he respecve mean hsorcal excess reurns for forecass begnnng n January The January 1990 nformaon s hen added o forecass for February 1990 and so forh. I follow Campbell and Thompson (008 and repor an ou-of-sample sasc ha can be compared wh he n-sample. Ths sasc obeys oos T e e ( r rˆ 1 (15 e e ( r r = 1 = T = 1 n whch e rˆ denoes he forecas of excess reurns up o -1 and e r represens he hsorcal mean excess reurn calculaed up o -1. If hs sasc s posve, hen he excess reurn predced by he forecas varables delvers lower mean squared errors han he hsorcal mean reurn. Noce ha I neher resrc coeffcens n he predcve regressons o he heorecally suggesed negave values nor requre forecased reurns o be posve. As 6 I used he MATLAB roune of Alexander Meyer-Gohde o calculae he one-sded Hodrck-Presco flered rend. Ths program s publcly avalable on hs IDEAS webse. 3

26 Campbell and Thompson (008 pon ou, mposng such resrcons almos always mproves he ou-of-sample forecasng power of he predcve varables. Panel A of able 9 summarzes hs sasc for a forecas regresson of naonal sock marke excess reurns on he respecve common and counry-specfc producon gap componens. The frs column presens oos when only he coeffcen on he common gap componen s used o calculae he forecas of excess reurns. The second column hen addonally akes no accoun he coeffcen on he counry-specfc componen. These sascs show ha for fve of he G7 counres nformaon abou he common producon gap delvers a beer ou-of-sample forecas performance han he smple hsorcal mean of he respecve excess reurns. For mos of hese counres, he counry-specfc par of he naonal producon gaps does no add mporan ou-of-sample forecas power. Noable excepons are Canada and he U.S. for whch oos akes negave values. In sum, he oos leave he mpresson ha he nformaon abou he common componens n naonal producon gaps helps o bea he hsorcal reurn n ou-of-sample forecass. The mporance of counry-specfc producon gap componens s weaker. Addonally, I follow Campbell and Thompson (008 as well as Ferrera and Sana Clara (011 and assess he economc mporance of he producon gap nformaon by akng he sance of a mean-varance opmsng nvesor. Each perod hs nvesor faces he choce o nves n he rsky asse (he sock marke excess reurn and a rsk-free asse (shor-erm neres rae. To make her choce, he nvesor eher uses nformaon abou he hsorcal average excess reurns on he sock marke or he predced sock marke reurn usng he decomposed producon gaps. Hence, a each pon n he forecas perod, each counry nvesor calculaes he opmal porfolo wegh for he rsky asse n counry wh ( rˆ r w = (16 γσˆ f,, 4 3

27 n whch rˆ represens he expeced reurn on he sock marke of counry up o me. The expeced reurn s derved eher from he mean average reurn or from predcve regressons on he respecve counry s common and counry-specfc producon gap componens. The erm, ˆ σ,, denoes he varance of he reurn, γ s he coeffcen of rsk averson assumed o be and f r, represens he counry shor-erm neres rae. Gven hese weghs, he reurn on he nvesor s porfolo a each pon n me obeys r w r w p, f, + 1 = ( 1 r (17 such ha I oban a me seres of porfolo reurns under he assumpon ha shorng socks ( w 0 and more han 50% leverage ( w 150 s no allowed hus followng Cooper and Presley (009, 01. To gauge he economc mporance of he producon gap nformaon, I calculae he cerany equvalens when usng he common or he common and dosyncrac producon gap componens o calculae he porfolo reurns. I compare hese cerany equvalens,.e. he he rsk-free reurn he nvesor would requre n order o be ndfferen beween he rsky sraegy and a rskless nvesmen sraegy. The cerany equvalen s calculaed from ce γ p, p,, = r σ (18 wh rsk averson γ =. The annualzed dfference o he cerany equvalen ha he nvesor obans when usng jus he hsorcal mean excess reurn o calculae porfolo reurns s presened n panel B of able 9. These resuls are broadly conssen wh he evdence n panel A of able 9. The nformaon abou he common producon gap o calculae expeced sock marke reurn leads o small gans for nvesors n he G7 counres. The only excepon s France. For France, akng addonally no accoun he nformaon abou he counry-specfc producon gap leads o cerany equvalen gans. For he oher counres hs addonal nformaon does no add any gans. 5 4

28 In sum, he ou-of-sample ess are conssen wh he n-sample regresson resuls. They show ha nformaon abou he common producon gap componen leads o a beer forecas performance and gans for mean-varance opmzng nvesor compared wh hsorcal mean excess reurns as ou-of-sample predcor. Informaon abou counry-specfc producon gaps s less mporan. [abou here Table 9] 4 Global and dosyncrac busness cycle rsk n U.S. bond excess reurns In lne wh evdence on he lnk of bond rsk prema wh common facors among a se of macroeconomc varables (Ludvgson and Ng, 009, Cooper and Presley (009 provde evdence for he predcve power of he U.S. producon gap no only for sock excess reurns bu also for U.S. bond excess reurns. They hus suppor he heorecal model of Hasselof (010 who shows ha sock and bond reurns are drven by common macroeconomc rsk facors. To complemen her analyss, I assess f he dsncon beween common and dosyncrac producon gap componens maers for explanng me-varaon n bond excess reurns. Ths assessmen s movaed especally by Dahlqus and Hasselof (011 who fnd ha boh local and global versons of he Cochrane and Pazzes (005 bond rsk facor explan me varaon n excess reurns on bonds n Germany, Swzerland, he UK and he U.S. In addon, Ilmanen (1995 and Cooper and Presley (01 provde evdence of global rsk drvng me-varyng bond excess reurns. I use prces on U.S. zero bonds o calculae annual bond excess reurns of wo- o fve-year bonds n excess of he yeld on a one-year bond. I employ wo ses of regressons o evaluae he mpac of he dfferen producon gap componens on bond excess reurns. Frs, followng Cooper and Presley (009, I regress he annual bond excess reurns on he 13- monh lagged naonal producon gap,.e. 6 5

29 brx N = 13 ν (19 N US α + β gap + Second, I regress annual bond excess reurns on he res-of-he-world producon gap from he U.S. perspecve o assess f he predcve power of naonal producon gaps s drven by global movemens n producon gaps. The esmae equaon obeys brx N = N G7 US α + β gap + 13 ν (0 Table 10 summarzes he resuls. Column (I presens he resuls from forecas regresson (19, column (II gves he resuls from forecas regresson (0. Newey-Wes (Newey and Wes, 1987 correced -sascs appear below he esmaes n parenhess. Agan he asersk sgnals a sgnfcan pon esmae a 95% confdence level for boh Newey-Wes and Valkanov correced -sascs. The sample covers he perod from January 1970 o December 003. The end of he sample perod s due o he lmed publc avalably of he CSP Fama and Blss daa on zero bonds. The begnnng of he sample perod s chosen o make he resuls of he bond reurn forecas regressons broadly comparable wh he sock reurn forecas regressons presened so far. The esmaes of he Cooper and Presley (009 rerun under column (I of able 10 show ha he producon gap s a powerful predcor of annual US bond excess reurns. The U.S. producon gap explans beween 3% (-year bond and 15% (5-year bond of he me varaon n U.S. bond excess reurns. Noce ha hese resuls are no drecly comparable wh he resuls of Cooper and Presley (009 due o he dfferen sar of he sample perod. The esmaes under column (II of able 10 hghlgh ha he res-of-he-world producon gap has sascally sgnfcan explanaory power for he U.S. bond excess reurns. Ths resul s n lne wh Ilmanen (1995 and Cooper and Presley (01 who provde evdence for he predcve power of global rsk facors for bond excess reurns. Ineresngly, he resof-he-world producon gap explans abou half as much me varaon as he U.S. producon gap for excess reurns on -year bonds. The relave explanaory power of he res-of-he- 7 6

30 world producon gap declnes wh he maury of he bonds. For he 5-year bond excess reurns, he res-of-he-world producon gap reveals only abou a quarer of he predcve power of he U.S. producon gap. I seems o be he case ha counry-specfc componens of he U.S. producon gap maer for explanng me-varyng bond excess reurns and her relave mporance seems o ncrease wh he maury of bonds. Fnally, o llusrae ha boh he dosyncrac and he common componen n he U.S. producon gap explan U.S. bond excess reurns, I perform he forecas regresson (8 for he bond excess reurns. Column (III of able 10 dsplays he respecve resuls whch corroborae ha he counry-specfc par of he U.S. producon gap as well as s common, global componen sgnfcanly explan. me-varaon n bond excess reurns. By consrucon hey delver he same f as he U.S. producon gap ha s no decomposed. Taken ogeher he observaons presened n able 10 lead o wo conclusons. Global macroeconomc rsk ceranly maers for explanaons of me-varyng bond rsk prema. However, s mporance decreases wh he maury of he bonds under consderaon. Ths laer fndng s relaed o he second man concluson. Counry-specfc rsks, such as e.g. he base of ax payers ha back governmen bonds, canno be negleced n hs respec. 5 Conclusons Ths paper complemens Cooper and Presely (009 who presen evdence for he explanaory power of naonal producon gaps for me-varaon n naonal sock marke reurns. The smple decomposon of ndusral producon devaons from rend no global and counry-specfc componens nroduced n hs paper hghlghs ha he explanaory power of producon gaps for naonal sock markes s largely due o global, busness cycle relaed rsk. Ou-of-sample ess suppor hs vew. These fndngs confrm sress ha he G7 sock markes are well negraed. 8 7

31 In conras o some earler sudes of he mpac of common busness cycle rsk on sock markes, he evdence presened n hs paper s based on varables ha can be readly nerpreed as mrror mage of global rsk whou he shor-cu of employng U.S. varables o explan foregn sock marke reurns. Ths approach addonally affrms he nerpreaon of he evdence provded n hs paper as evdence of global busness cycle rsk drvng he major sock markes. I s no a mrror mage of he U.S. busness cycle. Furhermore, hs paper shows ha foregn, res-of-he-world, macroeconomc rsk affecs U.S. asse markes. A res-of-he-world producon gap explans me varaon n he U.S. sock marke reurn whle he U.S.-specfc one does no. Evdence n hs drecon has been scarce as of ye. Ths fndng renforces he pon ha ruly global rsk plays a val role n explanaons of he me-varaon n naonal sock markes. Moreover, hs paper provdes furher evdence for he observaon ha boh global and counry-specfc macroeconomc rsks conrbue o explanng me-varaon n bond excess reurns. Appendx: Feedback of sock marke rsk prema on oupu gaps? Dynamcs on fnancal markes and he macroeconomy are nmaely lnked. However, s common pracce n he fnance leraure o focus on he explanaory power of macroeconomc varables for asse marke dynamcs bu no on he reverse relaon,.e. he feedback of asse marke movemens on he real economy (e.g. Chen e al., In he conex of he presen paper, hs relaes o he queson f me varaon n naonal sock marke excess reurns explan fuure me varaon n naonal producon gaps. I s beyond he scope of hs paper o provde a perfec dsncon beween cause and effec when evaluang he jon behavour of producon gaps and sock marke excess reurns. Bu can address he queson f changes of sock prces or devaons of ndusral producon from rend cause movemens of he oher varable n a sascal sense. A smple, ndcave 9 8

32 way o look a hs ssue s o evaluae Granger causaly (Granger, 1969 among naonal sock marke excess reurns and naonal producon gaps a he one-monh horzon. Table A1 presens he p-values of Granger causaly F-ess from vecor auoregressons (VA of naonal sock marke reurns and naonal producon gaps applyng a lag lengh of one monh. Translaed n he conex of hs paper, he null hypoheses of he F-ess are ha pas sock marke excess reurns do no help o forecas sock marke excess reurns n he presence of pas values of producon gaps. The coeffcens esmaed n he VA should be zero. Secondly, he VA approach also allows o evaluae he reverse Granger causaly,.e. evaluang f pas sock marke reurns help o forecas producon gaps n he presence of pas values of he producon gaps. The man resuls dsplayed n able A1 can be easly summarzed. In general, pas values of sock marke excess reurns do no Granger cause he respecve naonal producon gaps. Canada and Japan are borderlne cases as he null hypohess of sock marke excess reurns no Granger causng producon gaps s acceped a 6% sgnfcance level for Canada and a 5% sgnfcance level for Japan. For all of he oher counres, he sgnfcance level for accepng he null hypohess s consderably hgher. Hence, hese resuls show ha s jusfed o focus manly on he explanaory power of producon gaps on sock marke dynamcs as n Cooper and Presley (009 and hs paper. However, as he cases of Canada and Japan show, s mporan o bear n mnd ha causaly, or n hs case a leas Granger causaly, can also follow he oher drecon from asse markes o he real economy. In addon, here mgh be conemporaneous effecs ha are no capured n he Granger causaly es. 30 9

33 Table A1: P-values of Granger causaly ess (sock marke excess reurns and naonal producon gaps, lag lengh of one monh CND FA e r, 1 gap 1 e r, 1 gap 1 e r, e r, gap gap GE ITA e r, 1 gap 1 e r, 1 gap 1 e r, e r, gap gap JPN UK e r, 1 gap 1 e r, 1 gap 1 e r, e r, gap gap US e r, 1 gap 1 e r, gap Noes: Ths able provdes he p-values from Granger causaly ess of vecor auoregressons ha feaure naonal sock marke excess reurns and naonal producon gaps of he G7 counres. The null hypohess s ha he lagged varable does no Granger cause he oher varable

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36 Harvey, C.. (1991 The World Prce of Covarance sk, Journal of Fnance 46, Harvey, C.. (1995 Predcable sk and eurn n Emergng Markes, evew of Fnancal Sudes 3, Hasselof, H. (010, Socks, Bonds and Long-run Consumpon sk forhcomng Journal of Fnancal and Quanave Analyss. Heaon, J. and D. Lucas (000a Porfolo Choce n he Presence of Background sk, Economc Journal 110, 1-6. Heaon, J. and D. Lucas (000b Porfolo Choce and Asse Prces: The Imporance of Enrepreneural sk, Journal of Fnance 55, Hjalmarsson, E. (010 Predcng Global Sock eurns, Journal of Fnancal and Quanave Analyss 45, Hodrck,.J. (199 Dvdend Yelds and Expeced Sock eurns: Alernave Procedures for Inference and Measuremen, evew of Fnancal Sudes 5, Hoffmann, M. (011 Bankng Deregulaon, Enrepreneural sk and he Predcably of US Sock eurns, unpublshed workng paper Unversy of Zurch & CESfo. Ilmanen, A. (1995 Tme-varyng Expeced eurns n Inernaonal Bond Markes, Journal of Fnance 50(, Ioannds, C., Peel, D. A. and K.P.G. Mahews (006, Expeced sock reurns, aggregae consumpon and wealh: some furher evdence, Journal of Macroeconomcs 8, Kojen,.S.J., Lusg, H. and S. Van Neuwerburgh (010 The Cross-Secon and Tme Seres of Sock and Bond eurns, unpublshed workng paper Booh School of Busness Chcago, UCLA Anderson School of Managemen, New York Unversy, CEP and NBE. Leau, M. and S.C. Ludvgson (001 Consumpon, Aggregae Wealh and Expeced Sock eurns, Journal of Fnance 56, Ludvgson, S.C. and S. Ng (009 Macro Facors n Bond sk Prema, evew of Fnancal Sudes, Lusg, H. and S. Van Neuwerburgh (005 Housng Collaeral, Consumpon Insurance, and sk Prema: An Emprcal Perspecve, Journal of Fnance 60, Nagayasu, J. (009, Socks, consumpon, and wealh: evdence from he Tokyo Sock Exchange, n: George I. Ellson (ed, Sock eurns: Cyclcy, Predcon and Economc Consequences, NY: Nova Scence Publshers, Newey, W.K. and K.W. Wes (1987 A smple, posve semdefne, heeroskedascy and auocorrelaon conssen covarance marx, Economerca 55, Nschka, T. (010 Inernaonal evdence for reurn predcably and he mplcaons for he long-run covaraon of he G7 sock markes, German Economc evew 11,

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38 Tables Table 1: Correlaon coeffcens of oupu gaps CND FA GE ITA JPN UK US CND (0.58;0.69 (0.3;0.39 (0.43;0.56 (0.04;0. (0.30;0.45 (0.57;0.68 FA (0.57;0.68 (0.77;0.83 (0.5;0.40 (0.51;0.63 (0.7;0.80 GE (0.53;0.65 (0.70;0.78 (0.4;0.40 (0.4;0.40 ITA (0.35; (0.58; (0.69;0.77 JPN (0.1; (0.08;0.7 UK (0.74;0.81 US 1 Noes: Ths able presens he parwse correlaon coeffcens of he G7 counres oupu gaps over he sample perod from January 1970 o February 011. The numbers n parenhess ndcae he range of he correlaon coeffcens n he 95% confdence nerval

39 Table : Unvarae forecas (one monh regressons of sock excess reurns on producon gaps (I (II (III gap gap G7 gap US r e, CND ( * 0.01 ( ( 055 r e, FA ( * * 0.01 ( ( 0.88 r e, GE ( * * 0.01 ( ( 1.61 r e, ITA ( * ( (0.18 r e, JPN ( * * 0.0 ( ( 1.15 r e, UK ( * * 0.03 ( * 0.0 ( 3.5 r e, US ( * * 0.03 ( 4.58 Noes: Ths able provdes esmaes from one-monh ahead forecas regressons of counry s sock marke excess reurn on counry s producon gap (column (I, he average producon gap of he oher sx counres (column (II and he U.S. producon gap. The forecas regressons ake he followng form: r e, = + β gap α + ν (I r e, = G7 α + β gap + ν (II r e, US = + β gap α + ν (III Newey-Wes (Newey and Wes, 1987 correced -sascs appear below he esmaes n parenhess. Asersk ndcaes sgnfcance a 95% confdence level f boh Newey-Wes correced and Valkanov (003 correced - sascs ndcae sgnfcance a hs confdence level. The sample perod runs from January 1970 o February 011. The sasc s adjused for he number of regressors

40 Table 3: Mulvarae forecas (one monh regressons of sock excess reurns on producon gaps, erm spreads and dvdend-prce raos (I (II gap common, gap do, gap common, gap do, s * r e, CND ( ( ( ( ( * r e, FA ( ( * ( ( ( * r e, GE ( * 0.0 ( * ( ( ( r e, ITA ( * 0.01 ( ( * ( ( * r e, JPN ( ( * ( ( ( * r e, UK ( ( * ( ( ( * r e, US ( ( * ( ( ( 0.91 (III gap common, gap do, dp * r e, CND ( ( ( * r e, FA ( ( ( * r e, GE ( * ( ( r e, ITA ( * ( ( * r e, JPN ( ( ( * r e, UK ( ( ( * r e, US ( ( (

41 Noes: Ths able provdes esmaes from one-monh ahead forecas regressons of counry s sock marke excess reurn on ha componen of counry s producon gap ha s perfecly correlaed wh he average producon gap of he oher sx counres, common, gap, and ha componen ha s orhogonal o, do, gap (column (I and n addon o he wo producon gap componens on he counry s erm spread,.e. he yeld dfference beween a long-erm governmen bond and a shor-erm neres rae (column (II as well as he counry-specfc log dvdend-prce rao (column (III. The forecas regressons ake he followng form: r e, α β gap β gap + ν common, do, = (I r e, α β gap β gap β s + ν common, do, = (II r e, common, do, = + β1 gap + β gap + β 3dp 1 α + ν (III Newey-Wes (Newey and Wes, 1987 correced -sascs appear below he esmaes n parenhess. Asersk ndcaes sgnfcance a 95% confdence level f boh Newey-Wes correced and Valkanov (003 correced - sascs ndcae sgnfcance a hs confdence level. The sample perod runs from January 1970 o February 011. The sasc s adjused for he number of regressors

42 Table 4: Mulvarae, one-monh forecas regressons for dfferen subsample perods Panel A: sample perod January 1970 o June 1990 gap common, gap do, s r e, CND ( ( ( r e, FA ( ( ( r e, GE ( * ( ( e ITA r, ( * ( ( * r e, JPN ( ( ( * r e, UK ( ( ( * r e, US ( ( (0.1 Panel B: sample perod July 1990 o February 011 gap common, gap do, s * r e, CND ( ( ( r e, FA ( ( ( r e, GE ( ( ( * r e, ITA ( * ( ( r e, JPN ( ( ( * r e, UK ( ( ( * r e, US ( ( (

43 Noes: Ths able provdes esmaes from one-monh ahead forecas regressons of counry s sock marke excess reurn on ha componen of counry s producon gap ha s perfecly correlaed wh he average producon gap of he oher sx counres, common, gap, ha componen ha s orhogonal o, do, gap and n addon o he wo producon gap componens on he counry s erm spread,.e. he yeld dfference beween a long-erm governmen bond and a shor-erm neres rae The forecas regressons ake he followng form: r e, common, do, = + β1 gap + β gap + β 3s 1 α + ν Newey-Wes (Newey and Wes, 1987 correced -sascs appear below he esmaes n parenhess. Asersk ndcaes sgnfcance a 95% confdence level f boh Newey-Wes correced and Valkanov (003 correced - sascs ndcae sgnfcance a hs confdence level. Panel A provdes he esmaes for he sample perod from January 1970 o June Panel B gves he esmaes for he sample perod from July 1990 o February 011. The sasc s adjused for he number of regressors

44 Table 5: Long-horzon forecas regressons Panel A: 1 monh forecas horzon Acual esmaes Impled esmaes gap common, do, gap gap common, do, gap e CND r,, + h 1.68 ( ( 1.10 e FA r,, + h 1.86 ( (0.36 e GE r,, + h.08 ( (0.50 e ITA r,, + h 1.89 ( (0.69 e JPN r,, + h 3.1 * ( (1.48 e UK r,, + h.8 * ( ( 0.00 e US r,, + h 1.51 * ( ( 0.56 Panel B: 4 monh forecas horzon Acual esmaes Impled esmaes gap common, do, gap gap common, do, gap e CND r,, + h.98 ( ( 1.34 e FA r,, + h 4.16 ( ( 0.06 e GE r,, + h 4.31 ( (0.30 e ITA r,, + h 3.61 ( (0.04 e JPN r,, + h 7.65 * ( (1.5 e UK r,, + h 3.7 * ( (

45 Table 5 connued e US r,, + h.37 ( ( 0. Panel C: 36 monh forecas horzon Acual esmaes Impled esmaes gap common, do, gap gap common, do, gap e CND r,, + h 3.57 * ( ( 1.95 e FA r,, + h 6.75 * ( (0.10 e GE r,, + h 6.0 ( ( 0.05 e ITA r,, + h 5.83 * ( ( 0.84 e JPN r,, + h 9.48 * ( (1.5 e UK r,, + h 3.94 * ( (0.83 e US r,, + h.55 ( ( 0.64 Noes: Ths able provdes esmaes from 1, 4 and 36-monh ahead forecas regressons of counry s sock marke excess reurn on ha componen of counry s producon gap ha s perfecly correlaed wh he average producon gap of he oher sx counres, common, gap, and ha componen ha s orhogonal o, do, gap The forecas regressons ake he followng form: e,, h common,, h do, r, + h = α + β1 gap + β gap + ν, + h wh h he forecas horzon n monhs. Newey-Wes (Newey and Wes, 1987 correced -sascs appear below he esmaes n parenhess. Asersk ndcaes sgnfcance a 95% confdence level f boh Newey-Wes correced and Valkanov (003 correced -sascs ndcae sgnfcance a hs confdence level. The sample perod runs from January 1970 o February 011. The sasc s adjused for he number of regressors. The columns mpled esmaes gve pon esmaes and sascs mpled by he one-monh forecas regressons from able 3 under he null hypohess of no predcably (Boudoukh e al.,

46 Table 6: Unvarae forecas regressons (quarerly frequency of sock excess reurns on res-of-he-world producon gap unvarae mulvarae gap G7 1 gap G7 1 cay 1 US r e, CND ( * * ( (0.06 r e, FA ( * * ( (0.79 r e, GE ( * * ( (0.71 r e, ITA ( ( (0.3 r e, JPN ( * * ( ( 0.96 r e, UK ( * * ( (0.78 r e, US ( * * ( * 0.10 (.18 Noes: Ths able provdes esmaes from one-perod ahead forecas regressons of counry s sock marke excess reurn on he average producon gap of he oher sx counres when boh regressand and regressor are measured a he quarerly frequency. The lef column presens he esmaes from unvarae regressons of he form: r e, = G7 α + β gap 1 + ν The rgh column addonally akes no accoun ha earler sudes provded evdence for he explanaory power of shor-run varaon n he US consumpon-wealh rao, cay, for foregn sock marke reurns. The forecas regresson hen obeys r e, G7 US = + β gap 1 + γ cay 1 α + ν Newey-Wes (Newey and Wes, 1987 correced -sascs appear below he esmaes n parenhess. Asersk ndcaes sgnfcance a 95% confdence level f boh Newey-Wes correced and Valkanov (003 correced - sascs ndcae sgnfcance a hs confdence level. The sample perod runs from he frs quarer of 1970 o he fourh quarer of 010. The sasc s adjused for he number of regressors

47 Table 7: Prncpal componen coeffcens PC1 PC PC3 PC4 PC5 PC6 PC7 CND FA GE ITA JPN UK US % varance Noes: Ths able presens he prncpal componen coeffcens of he G7 counres oupu gaps. The las row of hs able % varance ndcaes how much of he common varaon n he oupu gaps s explaned by he respecve prncpal componen

48 Table 8: One monh ahead forecas regressons on frs prncpal componen of naonal producon gaps 1 PC r e, CND ( * 0.01 r e, FA ( * 0.01 r e, GE ( * 0.01 r e, ITA ( r e, JPN ( * 0.0 r e, UK ( * 0.03 r e, US ( * 0.03 Noes: Ths able provdes esmaes from one-monh ahead forecas regressons of counry s sock marke excess reurn on he frs prncple componen of he G7 counres producon gaps, PC 1. The forecas regressons ake he followng form: r e, 1 = + β PC α + ν Newey-Wes (Newey and Wes, 1987 correced -sascs appear below he esmaes n parenhess. Asersk ndcaes sgnfcance a 95% confdence level f boh Newey-Wes correced and Valkanov (003 correced - sascs ndcae sgnfcance a hs confdence level. The sample perod runs from January 1970 o February 011. The sasc s adjused for he number of regressors

49 Panel A: Table 9: Ou-of-sample forecas regressons oos (% Panel B: CE Gans gap common,, HP gap common,, HP gap common,, HP gap common,, HP + gap do,, HP + gap do,, HP CND FA GE ITA JPN UK US Noes: Panel A gves a sasc ha shows f he excess reurn predced by he forecas varables delvers lower mean squared errors han he hsorcal mean reurn. A posve value ndcaes ha does. Ths sasc s dsplayed when only he common componen n producon gaps s used o forecas he respecve counry s sock marke reurn and when boh common and counry-specfc componens are used. Ths sasc obeys oos T = 1 = T = 1 ( r ( r e e rˆ r e e 1 (14 n whch e rˆ denoes he forecas of excess reurns up o -1 and e r represens he hsorcal mean excess reurn calculaed up o -1. Panel B of hs able gves he annualzed dfferences beween cerany equvalens of radng sraeges from usng he common or boh common and counry-specfc componens of naonal producon gaps o make porfolo allocaon decsons and cerany equvalens from a porfolo sraegy employng he mean hsorcal sock marke excess reurn as predcor of expeced reurns. The cerany equvalens are calculaed from ce γ p, p,, = r σ wh rsk averson = γ

50 Table 10: Forecas regressons of annual US bond excess reurn on global and counry-specfc producon gap varees Sample perod: January 1970 o December 003 (I (II (III US gap G gap 7 US common gap do gap year bond 0.10 * 0.3 ( * 0.11 ( * ( * 0.3 ( year bond 0.14 * 0.19 ( * 0.06 ( * ( * 0.19 ( year bond 0.18 * 0.18 ( * 0.05 ( * ( * 0.18 ( year bond 0.19 * 0.15 ( * 0.04 ( ( * 0.15 ( 5.08 Noes: Ths able provdes esmaes from 1-year ahead forecas regressons of counry s bond excess reurn on counry s producon gap (column (I, he average producon gap of he oher sx counres (column (II and on ha componen of he US producon gap ha s orhogonal o he average producon gap of he oher sx counres, do gap The forecas regressons ake he followng form: brx N = 13 ν (I N US α + β gap + brx N = N G7 US α + β gap + ν 13 (II brx N N, common common N, do do = + β gap 13 + β gap 13 α + ν (III Newey-Wes (Newey and Wes, 1987 correced -sascs appear below he esmaes n parenhess. Asersk ndcaes sgnfcance a 95% confdence level f boh Newey-Wes correced and Valkanov (003 correced - sascs ndcae sgnfcance a hs confdence level. The sasc s adjused for he number of regressors

51 Swss Naonal Bank Workng Papers publshed snce 004: Samuel eynard: Fnancal Marke Parcpaon and he Apparen Insably of Money Demand 004- Urs W. Brchler and Dana Hancock: Wha Does he Yeld on Subordnaed Bank Deb Measure? Hasan Bakhsh, Hashma Khan and Barbara udolf: The Phllps curve under sae-dependen prcng 005- Andreas M. Fscher: On he Inadequacy of Newswre epors for Emprcal esearch on Foregn Exchange Inervenons Andreas M. Fscher: Measurng Income Elascy for Swss Money Demand: Wha do he Canons say abou Fnancal Innovaon? 006- Charloe Chrsansen and Angelo analdo: ealzed Bond-Sock Correlaon: Macroeconomc Announcemen Effecs Marn Brown and Chrsan Zehnder: Cred eporng, elaonshp Bankng, and Loan epaymen Hansjörg Lehmann and Mchael Manz: The Exposure of Swss Banks o Macroeconomc Shocks an Emprcal Invesgaon Karn Assenmacher-Wesche and Sefan Gerlach: Money Growh, Oupu Gaps and Inflaon a Low and Hgh Frequency: Specral Esmaes for Swzerland Marlene Amsad and Andreas M. Fscher: Tme-Varyng Pass-Through from Impor Prces o Consumer Prces: Evdence from an Even Sudy wh eal-tme Daa Samuel eynard: Money and he Grea Dsnflaon Urs W. Brchler and Maeo Facchne: Can bank supervsors rely on marke daa? A crcal assessmen from a Swss perspecve Pera Gerlach-Krsen: A Two-Pllar Phllps Curve for Swzerland Kevn J. Fox and Mahas Zurlnden: On Undersandng Sources of Growh and Oupu Gaps for Swzerland Angelo analdo: Inraday Marke Dynamcs Around Publc Informaon Arrvals Andreas M. Fscher, Gulzna Isakova and Ulan Termechkov: Do FX raders n Bshkek have smlar percepons o her London colleagues? Survey evdence of marke praconers vews

52 007- Ibrahm Chowdhury and Andreas Schaber: Federal eserve Polcy vewed hrough a Money Supply Lens Angelo analdo: Segmenaon and Tme-of-Day Paerns n Foregn Exchange Markes Jürg M. Blum: Why Basel II May Need a Leverage ao esrcon Samuel eynard: Mananng Low Inflaon: Money, Ineres aes, and Polcy Sance na osenbla-wsch: Loss Averson n Aggregae Macroeconomc Tme Seres Marn Brown, Mara ueda Maurer, Tamara Pak and Nurlanbek Tynaev: Bankng Secor eform and Ineres aes n Transon Economes: Bank-Level Evdence from Kyrgyzsan Hans-Jürg Büler: An Orhogonal Polynomal Approach o Esmae he Term Srucure of Ineres aes aphael Auer: The Colonal Orgns Of Comparave Developmen: Commen. A Soluon o he Seler Moraly Debae Franzska Bgnasca and Enzo oss: Applyng he Hrose-Kamada fler o Swss daa: Oupu gap and exchange rae pass-hrough esmaes Angelo analdo and Enzo oss: The reacon of asse markes o Swss Naonal Bank communcaon Lukas Burkhard and Andreas M. Fscher: Communcang Polcy Opons a he Zero Bound Karn Assenmacher-Wesche, Sefan Gerlach, and Toshaka Sekne: Moneary Facors and Inflaon n Japan Jean-Marc Naal and Ncolas Soffels: Globalzaon, markups and he naural rae of neres Marn Brown, Tullo Jappell and Marco Pagano: Informaon Sharng and Cred: Frm-Level Evdence from Transon Counres Andreas M. Fscher, Mahas Luz and Manuel Wäl: Who Prces Locally? Survey Evdence of Swss Exporers Angelo analdo and Paul Söderlnd: Safe Haven Currences

53 008-1 Marn Brown and Chrsan Zehnder: The Emergence of Informaon Sharng n Cred Markes 008- Yvan Lengwler and Carlos Lenz: Inellgble Facors for he Yeld Curve Karn Assenmacher-Wesche and M. Hashem Pesaran: Forecasng he Swss Economy Usng VECX* Models: An Exercse n Forecas Combnaon Across Models and Observaon Wndows Mara Clara ueda Maurer: Foregn bank enry, nsuonal developmen and cred access: frm-level evdence from ranson counres Marlene Amsad and Andreas M. Fscher: Are Weekly Inflaon Forecass Informave? aphael Auer and Thomas Chaney: Cos Pass Through n a Compeve Model of Prcng-o-Marke Marn Brown, Armn Falk and Erns Fehr: Compeon and elaonal Conracs: The ole of Unemploymen as a Dscplnary Devce aphael Auer: The Colonal and Geographc Orgns of Comparave Developmen Andreas M. Fscher and Angelo analdo: Does FOMC News Increase Global FX Tradng? Charloe Chrsansen and Angelo analdo: Exreme Coexceedances n New EU Member Saes Sock Markes Barbara udolf and Mahas Zurlnden: Measurng capal socks and capal servces n Swzerland Phlp Sauré: How o Use Indusral Polcy o Susan Trade Agreemens Thomas Boll and Mahas Zurlnden: Measurng growh of labour qualy and he qualy-adjused unemploymen rae n Swzerland Samuel eynard: Wha Drves he Swss Franc? Danel Kaufmann: Prce-Seng Behavour n Swzerland Evdence from CPI Mcro Daa Karn Assenmacher-Wesche and Sefan Gerlach: Fnancal Srucure and he Impac of Moneary Polcy on Asse Prces Erns Fehr, Marn Brown and Chrsan Zehnder: On epuaon: A Mcrofoundaon of Conrac Enforcemen and Prce gdy

54 aphael Auer and Andreas M. Fscher: The Effec of Low-Wage Impor Compeon on U.S. Inflaonary Pressure Chrsan Beer, Seven Ongena and Marcel Peer: Borrowng n Foregn Currency: Ausran Households as Carry Traders Thomas Boll and Mahas Zurlnden: Measuremen of labor qualy growh caused by unobservable characerscs 009- Marn Brown, Seven Ongena and Pnar Ye,sn: Foregn Currency Borrowng by Small Frms Maeo Bonao, Massmlano Caporn and Angelo analdo: Forecasng realzed (covarances wh a block srucure Wshar auoregressve model Paul Söderlnd: Inflaon sk Prema and Survey Evdence on Macroeconomc Uncerany Chrsan Ho: Explanng House Prce Flucuaons Sarah M. Len and Eva Köberl: Capacy Ulsaon, Consrans and Prce Adjusmens under he Mcroscope Phlpp Haene and Andy Surm: Opmal Cenral Counerpary sk Managemen Chrsan Ho: Banks and eal Esae Prces Terh Jokp and Alsar Mlne: Bank Capal Buffer and sk Adjusmen Decsons Phlp Sauré: Bounded Love of Varey and Paerns of Trade Ncole Allenspach: Bankng and Transparency: Is More Informaon Always Beer? Phlp Sauré and Hosny Zoab: Effecs of Trade on Female Labor Force Parcpaon Barbara udolf and Mahas Zurlnden: Producvy and economc growh n Swzerland Sébasen Kraenzln and Marn Schlegel: Bddng Behavor n he SNB's epo Aucons Marn Schlegel and Sébasen Kraenzln: Demand for eserves and he Cenral Bank's Managemen of Ineres aes Carlos Lenz and Marcel Savoz: Moneary deermnans of he Swss franc

55 010-1 Charloe Chrsansen, Angelo analdo and Paul Söderlnd: The Tme-Varyng Sysemac sk of Carry Trade Sraeges 010- Danel Kaufmann: The Tmng of Prce Changes and he ole of Heerogeney Lorano Mancn, Angelo analdo and Jan Wrampelmeyer: Lqudy n he Foregn Exchange Marke: Measuremen, Commonaly, and sk Premums Samuel eynard and Andreas Schaber: Modelng Moneary Polcy Perre Monnn and Terh Jokp: The Impac of Bankng Secor Sably on he eal Economy Sébasen Kraenzln and Thomas Nellen: Dayme s money Phlp Sauré: Overreporng Ol eserves Elzabeh Sener: Esmang a sock-flow model for he Swss housng marke Marn Brown, Seven Ongena, Alexander Popov, and Pnar Ye,sn: Who Needs Cred and Who Ges Cred n Easern Europe? Jean-Perre Danhne and André Kurmann: The Busness Cycle Implcaons of ecprocy n Labor elaons Thomas Nschka: Momenum n sock marke reurns: Implcaons for rsk prema on foregn currences Pera Gerlach-Krsen and Barbara udolf: Macroeconomc and neres rae volaly under alernave moneary operang procedures aphael Auer: Consumer Heerogeney and he Impac of Trade Lberalzaon: How epresenave s he epresenave Agen Framework? Tommaso Mancn Grffol and Angelo analdo: Lms o arbrage durng he crss: fundng lqudy consrans and covered neres pary Jean-Marc Naal: Moneary Polcy esponse o Ol Prce Shocks Kahrn Degen and Andreas M. Fscher: Immgraon and Swss House Prces Andreas M. Fscher: Immgraon and large banknoes aphael Auer: Are Impors from ch Naons Deskllng Emergng Economes? Human Capal and he Dynamc Effecs of Trade

56 Jean-Perre Danhne and John B. Donaldson: Execuve Compensaon: A General Equlbrum Perspecve Thorsen Beck and Marn Brown: Whch Households Use Banks? Evdence from he Transon Economes 011- Marn Brown, Karoln Krschenmann and Seven Ongena: Foregn Currency Loans Demand or Supply Drven? Vcora Galsband and Thomas Nschka: Foregn currency reurns and sysemac rsks Francs Breedon and Angelo analdo: Inraday paerns n FX reurns and order flow Basl Guggenhem, Sébasen Kraenzln and Slvo Schumacher: Explorng an unchared marke: Evdence on he unsecured Swss franc money marke Pamela Hall: Is here any evdence of a Greenspan pu? Danel Kaufmann and Sarah Len: Secoral Inflaon Dynamcs, Idosyncrac Shocks and Moneary Polcy Iva Cecchn: Morgage ae Pass-Through n Swzerland aphael A. Auer, Kahrn Degen and Andreas M. Fscher: Low-Wage Impor Compeon, Inflaonary Pressure, and Indusry Dynamcs n Europe aphael A. Auer and Phlp Sauré: Spaal Compeon n Qualy, Demand-Induced Innovaon, and Schumpeeran Growh Massmlano Caporn, Angelo analdo and Paolo Sanucc de Magsrs: On he Predcably of Sock Prces: a Case for Hgh and Low Prces Jürg Mägerle and Thomas Nellen: Ineroperably beween cenral counerpares Sylva Kaufmann: K-sae swchng models wh endogenous ranson dsrbuons Sébasen Kraenzln and Benedk von Scarpae: Barganng Power n he epo Marke aphael A. Auer: Exchange ae Pass-Through, Domesc Compeon, and Inflaon: Evdence from he 005/08 evaluaon of he enmnb 01-0 Sgne Krogsrup, Samuel eynard and Barbara Suer: Lqudy Effecs of Quanave Easng on Long-Term Ineres aes

57 01-03 Maeo Bonao, Massmlano Caporn and Angelo analdo: sk spllovers n nernaonal equy porfolos Thomas Nschka: Bankng secors nernaonal nerconnecedness: Implcaons for consumpon rsk sharng n Europe Marn Brown, Seven Ongena and Pnar Yeşn: Informaon Asymmery and Foregn Currency Borrowng by Small Frms Phlp Sauré and Hosny Zoab: eremen Age across Counres: The ole of Occupaons Chrsan Ho and Terh Jokp: Housng Bubbles and Ineres aes oman Baerswyl and Camlle Cornand: educng overreacon o cenral bank s dsclosures: heory and expermen Bo E. Honoré, Danel Kaufmann and Sarah Len: Asymmeres n Prce-Seng Behavor: New Mcroeconomerc Evdence from Swzerland Thomas Nschka: Global and counry-specfc busness cycle rsk n me-varyng excess reurns on asse markes

58 Swss Naonal Bank Workng Papers are also avalable a secon Publcaons/esearch Subscrpons or ndvdual ssues can be ordered a Swss Naonal Bank, Fraumünsersrasse 8, CH-80 Zurch, fax , E-mal [email protected]