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This paper examines the hypothesis that predictable variation in excess returns can be explained by future business conditions. Using GARCH-M methodology and data on U.K. share returns over the period 1965-92, the authors find that excess returns are able to capture expectations regarding the future state of the economy. Futher, 'news' on future business conditions in the economy would appear to be related to the observed persistence in the conditional variance of excess returns.
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Black et al. (1995) studied this question.
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