# Why can the t-bill rate forecast stock returns?

The tbill rate is used as a predictor of the equity premium in a number of papers.

Whilst there is not a general consensus about whether it is a significant predictor, it is still widely used.

I am wondering the theory of why the tbill rate could forecast stock returns?

Is it because this is the rate firms can lend at?

But I do find this to be unrealistic if so, could a WACC for each firm do a better job at forecasting firm-specific returns?

• Could you link some papers as a reference, please? – skoestlmeier Mar 15 at 10:58
• If we assume that the Market RIsk Premium $R_{PM}$ is constant, then the expected market return $R_M=R_F+R_{PM}$ varies with the risk free rate. – Alex C Mar 15 at 21:18
• Why would the market risk premium be constant! I'd suggest that the risk free rate is much more constant. Do you have any references to support your comment. – user30609 Mar 18 at 8:12