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Unobservable systematic risk, economic activity and stock market

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  • Santis, Roberto A. De

Abstract

I extract a latent systematic risk factor, which is orthogonal to idiosyncratic risk and observable systematic risk, from credit spreads for 1764 Eurobonds across euro area non-financial firms over the 1999–2015 period. The extracted common latent factor negatively predicts stock market excess returns, the growth rate in real economic activity and economic sentiment. It predicts the financial crisis and the two economic recessions.

Suggested Citation

  • Santis, Roberto A. De, 2018. "Unobservable systematic risk, economic activity and stock market," Journal of Banking & Finance, Elsevier, vol. 97(C), pages 51-69.
    • Handle: RePEc:eee:jbfina:v:97:y:2018:i:c:p:51-69
    DOI: 10.1016/j.jbankfin.2018.09.014
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    JEL classification:

    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • F36 - International Economics - - International Finance - - - Financial Aspects of Economic Integration
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

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