Using Production Based Asset Pricing to Explain the Behavior of Stock Returns Over the Business Cycle
John H. Cochrane
The investment return is defined as the real return that results from
marginally increasing investment at date r, and then reaping the extra output
and decreasing investment at date t+1 to leave the production plan for other
dates unchanged. This paper constructs inveatment returns from investment
data and a production function, and compares investment returns to stock
returns, in order to explain forecasts of stock returns by business cycle
related variables, and to explain forecasts of future economic activity by
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