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Recession fears as self-fulfilling prophecies? Influence on stock returns and output

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Author Info

  • John G Powell

    (Independent, Wyevale, Canada)

  • Sirimon Treepongkaruna

    (The University of Western Australia – Accounting and Finance, Perth, Australia)

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    Abstract

    Market participants must rely upon probability assessments of the current state of the economy, that is, their rational ex-ante estimates of recession fears, when making financial and investment decisions. This paper explores whether ex-ante recession fears, modelled using probit analysis of coincident indicators, affect stock returns and output during recessions as well as upturns. Ex-ante recession fears are unrelated to stock returns, an unexpected result that is explained by the lead-lag relationship between recession turning points and subsequent stock market recoveries. Ex-ante recession fears have important dampening effects on output during and, especially, prior to recessions, thus suggesting that recession fears can potentially become self-fulfilling.

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    File URL: http://aum.sagepub.com/content/37/2/231.abstract
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    Bibliographic Info

    Article provided by Australian School of Business in its journal Australian Journal of Management.

    Volume (Year): 37 (2012)
    Issue (Month): 2 (August)
    Pages: 231-260

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    Handle: RePEc:sae:ausman:v:37:y:2012:i:2:p:231-260

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    Web page: http://www.agsm.edu.au

    Related research

    Keywords: ex-ante recession fears; ex-ante recession probability assessment; ex-ante stock market and output recession fear effects;

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