Business cycle variation in the risk-return trade-off
Name
Verdelhan_Business cycle.pdf
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397.16 KB
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Checksum (MD5)
23031474e8282e2551834014d72acd02
Author(s)
Lustig, Hanno
Verdelhan, Adrien Frederic
Date Issued
December 2012
Journal
Journal of Monetary Economics
Publisher
Elsevier
Citation
Lustig, Hanno, and Adrien Verdelhan. “Business Cycle Variation in the Risk-Return Trade-Off.” Journal of Monetary Economics 59 (2012): S35–S49.
Version
Original manuscript
Abstract
In the United States and other Organisation for Economic Co-operation and Development (OECD) countries, the expected returns on stocks, adjusted for volatility, are much higher in recessions than in expansions. We consider feasible trading strategies that buy or sell shortly after business cycle turning points that are identifiable in real time and involve holding periods of up to 1 year. The observed business cycle changes in expected returns are not spuriously driven by changes in expected near-term dividend growth. Our findings imply that value-maximizing managers face much higher risk-adjusted costs of capital in their investment decisions during recessions than expansions.
MIT Department
Sloan School of Management
Terms of Use
Creative Commons Attribution-NonCommercial-NoDerivs License
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DOI of Published Version
https://doi.org/10.1016/j.jmoneco.2012.11.003
