THE ASYMMETRIC EFFECT OF THE BUSINESS CYCLE ON THE RELATION BETWEEN STOCK MARKET RETURNS AND THEIR VOLATILITY
Steffen Sorensen () and
CAMA Working Papers from Centre for Applied Macroeconomic Analysis, Crawford School of Public Policy, The Australian National University
We examine the relation between US stock market returns and the US business cycle for the period 1960 - 2003 using a new methodology that allows us to estimate a time-varying equity premium. We identify two channels in the transmission mechanism. One is through the mean of stock returns via the equity risk premium, and the other is through the volatility of returns. We provide support for previous ?ndings based on simple correlation analysis that the relation is asymmetric with downturns in the business cycle having a greater negative impact on stock returns than the positive e?ect of upturns. We also obtain a new result, that demand and supply shocks a?ect stock returns di?erently. Our model of the relation between returns and their volatility encompasses CAPM, consumption CAPM and Merton’s (1973) inter-temporal CAPM. It is implemented using a multi-variate GARCH-in-mean model with an asymmetric time-varying conditional heteroskedasticity and correlation structure.
JEL-codes: C32 C51 E44 G12 (search for similar items in EconPapers)
Pages: 38 pages
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Working Paper: The Asymmetric Effect of the Business Cycle on the Realtion between Stock Market Returns and their Volatility (2006)
Working Paper: The asymmetric effect of the business cycle on the relation between stock market returns and their volatility (2005)
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Persistent link: https://EconPapers.repec.org/RePEc:een:camaaa:2006-05
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