Numerous studies argue that the market risk premium is associated with economic conditions and show that proxies for 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...

This study investigates the impact of return extrapolation on risk-return trade-offs in both the aggregate time series and the cross section of stocks. We find that the relation between the market’s expected return and expected variance is positive during periods with a low degree of...