Equity, Credit and the Business Cycle

Abstract

Both domestic economies and financial markets are affected by cycles that are often represented through multi-state models such as Markov Switching models. This article discusses the performances associated to the government bond, the equity and the credit cases along the business cycle, using both an European and a US dataset over the 1987-2010 period. Periods of non-inflationary growth have been strongly supportive to the credit universe, whereas inflationary growth has led to a strong performance of the equity asset class. On the contrary, recession periods are characterized by strong performances from government and Investment Grade bonds. These statements hold both in the US and in the European cases.

Keywords: Asset Allocation, Markov Switching, Density Test, Equity, Credit

JEL Classification: G14, G11