Return decomposition over the business cycle

Tolga Cenesizoglu

Journal of Banking & Finance, 2022, vol. 143, issue C

Abstract: Based on a generalization of the Campbell and Shiller (1988) approach to a framework with regime-switching parameters and variances, we analyze the conditional variance decomposition of the market return over the business cycle. Discount-rate news is more important than cash-flow news in determining the conditional variance of the market return in recessions, while the opposite holds true in expansions. In an asset pricing model with regime-switching fundamentals, the fact that discount-rate news is more sensitive to changes in investors’ beliefs about the state of the economy, which are more volatile in recessions, provides a potential explanation.

Keywords: Cash-flow news; Discount-rate news; Business cycle; Regime switching; Time varying conditional variances; Learning (search for similar items in EconPapers)
JEL-codes: G12 G14 (search for similar items in EconPapers)
Date: 2022
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:jbfina:v:143:y:2022:i:c:s0378426622001881

DOI: 10.1016/j.jbankfin.2022.106592

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