Recession fears as self-fulfilling prophecies? Influence on stock returns and output

John G Powell and Sirimon Treepongkaruna
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John G Powell: Independent, Wyevale, Canada
Sirimon Treepongkaruna: The University of Western Australia – Accounting and Finance, Perth, Australia

Australian Journal of Management, 2012, vol. 37, issue 2, 231-260

Abstract: Market participants must rely upon probability assessments of the current state of the economy, that is, their rational ex-ante estimates of recession fears, when making financial and investment decisions. This paper explores whether ex-ante recession fears, modelled using probit analysis of coincident indicators, affect stock returns and output during recessions as well as upturns. Ex-ante recession fears are unrelated to stock returns, an unexpected result that is explained by the lead-lag relationship between recession turning points and subsequent stock market recoveries. Ex-ante recession fears have important dampening effects on output during and, especially, prior to recessions, thus suggesting that recession fears can potentially become self-fulfilling.

Keywords: ex-ante recession fears; ex-ante recession probability assessment; ex-ante stock market and output recession fear effects (search for similar items in EconPapers)
Date: 2012
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Persistent link: https://EconPapers.repec.org/RePEc:sae:ausman:v:37:y:2012:i:2:p:231-260

DOI: 10.1177/0312896211423554

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