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RESEARCH

The procyclicality premium

Moving with business cycles, procyclical stocks have been found to yield higher average returns than countercyclical stocks. William Goetzmann and Akiko and Masahiro Watanabe use 50 years of real GDP growth expectations from economists’ surveys to determine forecasted economic states in order to avoid the effects of econometric forecasting model error. The scholars created a priced risk measure by loading the expected real GDP growth rate and from this have discovered the procyclicality premium. Welcome to a snappy new term. Read on to find out how it works.

121109_Procyclical stocks earn higher returns