Using Production Based Asset Pricing to Explain the Behavior of Stock Returns Over the Business Cycle
NBER Working Paper No. 3212 (Also Reprint No. r1686)
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 investment 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 stock returns.
Published: "Production-Based Asset Pricing and the Link Between Stock Returns and Economic Fluctuations." From The Journal of Finance, Vol. 46, No. 1, pp. 209-2 37, (March 1991).