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

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  • John G Powell

    (Independent, Wyevale, Canada)

  • Sirimon Treepongkaruna

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

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.

Suggested Citation

  • John G Powell & Sirimon Treepongkaruna, 2012. "Recession fears as self-fulfilling prophecies? Influence on stock returns and output," Australian Journal of Management, Australian School of Business, vol. 37(2), pages 231-260, August.
    • Handle: RePEc:sae:ausman:v:37:y:2012:i:2:p:231-260
    DOI: 10.1177/0312896211423554
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