The Dynamic Relations between Market Returns and Two Types of Risk with Business Cycles

Xiaoquan Jiang and Bong-Soo Lee

The Financial Review, 2014, vol. 49, issue 3, 593-618

Abstract: We examine the dynamic relations among market returns, market (MV), and idiosyncratic (IV) around business cycles. Compared to the conventional view, which treats MV and IV separately, we first find that excess return on the market anticipates negative MV and IV, suggesting market return's role as an economic indicator, with the relation stronger in recessions. Second, IV helps predict positive MV, mainly in early part of recessions, suggesting a dynamic evolution from IV to MV. Third, MV helps predict negative IV, suggesting MV may substitute IV to some extent.

Date: 2014
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