Equity Returns and the Business Cycle: The Role of Supply and Demand Shocks

Alfonso Mendoza-Velázquez () and Peter Smith

CAMA Working Papers from Centre for Applied Macroeconomic Analysis, Crawford School of Public Policy, The Australian National University

Abstract: The equity premium in the UK appears to have risen significantly since the start of the financial crisis and the associated extended recession. This paper examines the relationship between the business cycle and equity market returns to see how robust this association is. Several classifications of UK business cycle quarters are examined and related to the returns from an investment strategy which buys the market one or more quarters after a business cycle quarter and holds it for one year. Official business cycle dating methods as well as identified structural macroeconomic shocks are examined. The findings are that there is clear evidence for counter-cyclicality in excess returns. Returns are significantly higher in the year following a recession rather than an expansion quarter. There is also a significant difference in the pattern of returns if the downturn in the quarter is the result of a supply or demand shock. Negative supply shocks are found to have an especially large and significant counter cyclical impact on returns. This paper analyses a long period of UK data for determining realised returns using revised data as well as expected returns using a shorter dataset of real-time data. The paper finds similar results for the two datasets suggesting that realsied and expected returns may not be so different from one another. The paper also assesses the ability of the models to forecast outside of their sample period.

Keywords: Equity Returns; Equity Premium; Business Cycle (search for similar items in EconPapers)
JEL-codes: C32 C51 E44 G12 (search for similar items in EconPapers)
Pages: 33 pages
Date: 2013-05
New Economics Papers: this item is included in nep-eec and nep-for
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

Downloads: (external link)
https://cama.crawford.anu.edu.au/sites/default/fil ... _velazquez_smith.pdf (application/pdf)

Related works:
Journal Article: Equity Returns and the Business Cycle: the Role of Supply and Demand Shocks (2013)
Working Paper: Equity Returns and the Business Cycle: The Role of Supply and Demand Shocks (2012)
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:een:camaaa:2013-22

Access Statistics for this paper

More papers in CAMA Working Papers from Centre for Applied Macroeconomic Analysis, Crawford School of Public Policy, The Australian National University Contact information at EDIRC.
Bibliographic data for series maintained by Cama Admin ().