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http://ssrn.com/abstract=1670715
 
 

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Business Cycle Variation in the Risk-Return Trade-Off


Hanno N. Lustig


UCLA - Anderson School of Management; National Bureau of Economic Research (NBER)

Adrien Verdelhan


Massachusetts Institute of Technology (MIT) - Sloan School of Management; National Bureau of Economic Research (NBER)

February 10, 2011

Journal of Monetary Economics, Forthcoming

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 one 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.

Number of Pages in PDF File: 35

Keywords: Risk Premia, Sharpe Ratio

JEL Classification: E44, G12

working papers series


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Date posted: September 2, 2010 ; Last revised: November 13, 2012

Suggested Citation

Lustig, Hanno N. and Verdelhan, Adrien, Business Cycle Variation in the Risk-Return Trade-Off (February 10, 2011). Journal of Monetary Economics, Forthcoming. Available at SSRN: http://ssrn.com/abstract=1670715 or http://dx.doi.org/10.2139/ssrn.1670715

Contact Information

Hanno N. Lustig
UCLA - Anderson School of Management ( email )
405 Hilgard Avenue
Box 951361
Los Angeles, CA 90095
United States
National Bureau of Economic Research (NBER)
1050 Massachusetts Avenue
Cambridge, MA 02138
United States
Adrien Verdelhan (Contact Author)
Massachusetts Institute of Technology (MIT) - Sloan School of Management ( email )
77 Massachusetts Ave.
E62-416
Cambridge, MA 02142
United States
National Bureau of Economic Research (NBER) ( email )
1050 Massachusetts Avenue
Cambridge, MA 02138
United States
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