Journal of Financial and Quantitative Analysis Vol. 58 No. 7 2023
Business Cycles, Regime Shifts, and Return Predictability
Abstract
Consistent with the empirical properties of the consumption data, I develop a model in which consumption and dividend growth follow regime-switching dynamics. I show that regime-shift risk is priced in the model. Regime-shift risk exhibits dominant influence on asset prices: It generates a high equity premium and also induces time-varying risk premiums. The model explains major business cycle-dependent asset market phenomena and, in particular, the stronger predictability of stock returns during recessions.
- DOI
- 10.1017/s0022109023000261
- Volume
- 58
- Issue
- 7
- Pages
- 3058-3084
- Language
- en
- Sources
- bibtex:phds-export.bib openalex crossref