Recession fears as self-fulfilling prophecies? Influence on stock returns and output
AbstractMarket 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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Bibliographic InfoArticle provided by Australian School of Business in its journal Australian Journal of Management.
Volume (Year): 37 (2012)
Issue (Month): 2 (August)
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Web page: http://www.agsm.edu.au
ex-ante recession fears; ex-ante recession probability assessment; ex-ante stock market and output recession fear effects;
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