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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?

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    $\begingroup$ Could you link some papers as a reference, please? $\endgroup$ – skoestlmeier Mar 15 at 10:58
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    $\begingroup$ 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. $\endgroup$ – Alex C Mar 15 at 21:18
  • $\begingroup$ 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. $\endgroup$ – user30609 Mar 18 at 8:12

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