Business-Cycle Pattern of Asset Returns: A General Equilibrium Explanation∗
نویسندگان
چکیده
I develop an analytical general-equilibrium model to explain economic sources of businesscycle pattern of aggregate stock market returns. With concave production functions and capital accumulation, a technology shock has a pro-cyclical direct effect and a counter-cyclical indirect effect on expected returns. The indirect effect, reflecting the “feedback” effect of consumers’ behavior on asset returns, dominates the direct effect and causes counter-cyclical variations of expected returns. I show that the conditional mean, volatility, and Sharpe ratios of asset returns all vary counter-cyclically and they are persistent and predictable, and that stock market behavior has forecasting power for real economic activity. JEL Classification: D51, E30, G11, G12
منابع مشابه
Explaining international comovements of output and asset returns: The role of money and nominal rigidities
Output and asset returns are highly positively correlated across the U.S. and the remaining major industrialized countries. Standard business cycle models that assume #exible prices and wages, in the real business cycle (RBC) tradition, have great di$culties explaining this fact. This paper presents a dynamic-optimizing stochastic general equilibrium model of a two-country world with sticky nom...
متن کاملIndustrial Organization , Asset Pricing , and Business Cycles ∗
We develop a dynamic general equilibrium model with many different industries, in which firms set prices strategically in product markets. Our approach extends previous literature by endogenizing the market price of risk and allowing for more general risk structures. General equilibrium in the model is shown to exist under general conditions. Strategic interaction between firms amplifies busine...
متن کاملBusiness - cycle consumption risk and asset prices ∗
We disaggregate consumption growth into components with different levels of persistence and show that a single business-cycle consumption factor can explain satisfactorily the differences in risk premia across book-to-market and size-sorted portfolios. We argue that accounting for persistence heterogeneity in consumption is important for interpreting cross-sectional risk compensations in financ...
متن کاملOptimal Growth and Competitive Equilibrium Business Cycles under Decreasing Returns in Two-country Models
This paper investigates the interlinkage in the business cycles of large-country economies in a free-trade equilibrium. We consider a two-country, two-good, two-factor general equilibrium model with Cobb-Douglas technologies and linear preferences. We also assume decreasing returns in both sectors. We first identify the determinants of each country’s accumulation pattern in autarky equilibrium,...
متن کاملThe Excess Comovement of International Stock Markets in Bad Times: A Rational Expectations Equilibrium Model
We present an intertemporal, rational expectations equilibrium model where the cross-sectional covariances and correlations of international market returns increase during bad times, as a consequence of an endogenous increase in the uncertainty about the global economy. We assume that the drift rates of the fundamental processes of international economies are jointly affected by an unobservab...
متن کامل