Business-cycle pattern of asset returns: a general equilibrium explanation

Qiang Kang ()
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Qiang Kang: Florida International University

Annals of Finance, 2019, vol. 15, issue 4, No 3, 539-561

Abstract: Abstract I develop an analytical general-equilibrium model to explain economic sources of business-cycle 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.

Keywords: Counter-cyclical variation; Capital accumulation; Decreasing returns to capital; Overlapping-generation model (search for similar items in EconPapers)
JEL-codes: D51 E30 G11 G12 (search for similar items in EconPapers)
Date: 2019
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DOI: 10.1007/s10436-019-00347-y

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