Business conditions and speculative assets

In this paper we examine the hypothesis that the predictable components of U.K. shares and bonds are related to business conditions. Financial market variables, such as maturity and default premia, are constructed in an attempt to capture different components of business-conditions risk. The hypothesis is investigated using multivariate regression analysis and a latent variable model. One of the main conclusions reached in this paper is that the time-varying component of U.K. share and bond excess returns tends to exhibit varying degrees of sensitivity to information on business conditions as captured ex ante by a number of financial variables.