Revealing Downturns

Martin Schmalz and Sergey Zhuk

No 12597, CEPR Discussion Papers from Centre for Economic Policy Research

Abstract: When Bayesian risk-averse investors are uncertain about their assets' cash flows' exposure to systematic risk, stock prices react more to news in downturns than in upturns, implying higher volatility in downturns and negatively skewed returns. The reason is that, in good times, less desirable assets with low average cash flows and high loading on market risk perform similar to more desirable assets with high average cash flows and low market risk, rendering them difficult to distinguish. However, their relative fundamental performance diverges in downturns, enabling better inference. Consistent with these predictions, stocks' reaction to earnings news is up to 70% stronger in downturns than in upturns.

Keywords: Earnings response; Business cycle; Asymmetry; Bayesian learning (search for similar items in EconPapers)
JEL-codes: G00 G10 G12 G14 (search for similar items in EconPapers)
Date: 2018-01
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

Downloads: (external link)
https://cepr.org/publications/DP12597 (application/pdf)

Related works:
Journal Article: Revealing Downturns (2019)
Working Paper: Revealing Downturns (2018)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:cpr:ceprdp:12597

Ordering information: This working paper can be ordered from
https://cepr.org/publications/DP12597

Access Statistics for this paper

More papers in CEPR Discussion Papers from Centre for Economic Policy Research 33 Great Sutton Street, London EC1V 0DX, UK.
Bibliographic data for series maintained by CEPR ().