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Openness and the effect of business cycle synchronization on the equity risk premium

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  • Gitelson, Natalia
  • Manes, Eran

Abstract

We augment the Lucas tree model by allowing diffusion from a leader to follower countries and use it to derive an equity risk premium (ERP) formula that features a positive effect of countries’ degree of business cycle synchronization on their ERP. Using panel data of 122 countries for the period 2012–2022, we empirically validate that countries' correlation of GDP gap with that of the U.S. has a positive effect on ERP. We further show that a size-adjusted measure of trade openness has a positive effect on ERP and that this effect is moderated by income. We conclude that investors perceive open economies with a high degree of business cycle synchronization as high-beta investments.

Suggested Citation

  • Gitelson, Natalia & Manes, Eran, 2025. "Openness and the effect of business cycle synchronization on the equity risk premium," Research in International Business and Finance, Elsevier, vol. 77(PA).
    • Handle: RePEc:eee:riibaf:v:77:y:2025:i:pa:s0275531925001539
    DOI: 10.1016/j.ribaf.2025.102897
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    Keywords

    Equity risk premium; Business cycle synchronization; Economic openness; International business cycle;
    All these keywords.

    JEL classification:

    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • 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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