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Predicting excess returns in Europe with industrial electricity usage: Countercycli- cal risk premium
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School of Business |
Bachelor's thesis
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en
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19
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Can industrial electricity usage growth be used to predict excess returns by predicting business cycles and the counter cyclical risk premium? My findings with annual data from 1972 to 2022 suggest that electricity usage growth predicts excess returns best in Japan, the United Kingdom and the United States with significant in-sample 𝑅2 rates of 10%, 8% and 7%, but loses predictive power in most European countries, and especially if missing data from 1970 to 1980. In response to the low 𝑅2s in Europe, I present research that supports a change in the structure of industrial electricity use, which may affect the causality between electricity use and business cycles in smaller countries. Finally, I compare industrial electricity consumption with the output gap and find that the output gap retains its predictive power in Europe while significant 𝑅2s vary between 10% and 20% and thus being a more robust indicator.