Equity Returns and the Business Cycle: The Role of Supply and Demand Shocks
AbstractThe price of aggregate risk in the UK appears to have risen significantly since the start of the financial crisis and the associated extended recession. This paper examines the relationship between the business cycle and equity market returns to see how robust this association is. Several classifications of UK business cycle quarters are examined and related to the returns from an investment strategy which buys the market one or more quarters after a business cycle quarter and holds it for one year. OÂ¢cial business cycle dating methods as well as identified structural macroeconomic shocks are examined. The findings are that there is clear evidence for countercyclicality in excess returns. Returns are significantly higher in the year following a recession rather than an expansion quarter. There is also a significant difference in the pattern of returns if the downturn in the quarter is the result of a supply or demand shock. Negative supply shocks are found to have an especially large and signicant counter cyclical impact on returns.
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Bibliographic InfoPaper provided by Department of Economics, University of York in its series Discussion Papers with number 12/36.
Date of creation: Dec 2012
Date of revision:
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Postal: Department of Economics and Related Studies, University of York, York, YO10 5DD, United Kingdom
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Web page: http://www.york.ac.uk/economics/
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Equity Returns; Risk Premium; Business Cycle;
Other versions of this item:
- Alfonso Mendoza Velázquez & Peter N. Smith, 2013. "Equity Returns and the Business Cycle: the Role of Supply and Demand Shocks," Manchester School, University of Manchester, vol. 81, pages 100-124, 09.
- Alfonso Mendoza Velázquez & Peter N. Smith, 2013. "Equity Returns and the Business Cycle: The Role of Supply and Demand Shocks," CAMA Working Papers 2013-22, Centre for Applied Macroeconomic Analysis, Crawford School of Public Policy, The Australian National University.
- G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
- C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes
- C51 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Construction and Estimation
- E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
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