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The equity premium follows a pronounced v-shape pattern around the beginning of recessions. It sharply drops into negative territory just before business cycle peaks and then strongly recovers as the recession unfolds. Recessions are preceded by an inverted yield curve. Thus probit models using...
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deteriorate, uncertainty rises and investors' opinions polarize. Disagreement thus spikes in bad times, causing returns to react … to past news. This phenomenon creates a positive relation between disagreement and future returns. It also generates time …
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. Such residual, however, turns out to be an out-of-sample forecast of corporate bond market returns. An investment strategy … based on such forecasts delivers risk-adjusted returns 50% higher than the corporate bond market …
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