Recessions and the Stock Market

56 Pages Posted: 30 Apr 2018 Last revised: 25 Jun 2021

See all articles by Tim Alexander Kroencke

Tim Alexander Kroencke

University of Neuchatel - Institute of Financial Analysis

Date Written: June 25, 2021


Using an event-study type analysis of the price-dividend ratio around recessions, I examine the forces that drive the stock market down. First, point in time measured prices anticipate cash flows while time-aggregated prices drop contemporaneously. This finding speaks against the idea that the stock market anticipates future business conditions due to an economic mechanism. Second, the variance of prices increases substantially more than the variance of cash flows during recessions. This result suggests that changes in the price of risk play an essential role. However, the magnitude necessary is challenging to reconcile by standard asset pricing models.

Keywords: Business cycles and the stock market; predictability of the price-dividend ratio; empirical evaluation of macro-finance models.

JEL Classification: G12

Suggested Citation

Kroencke, Tim Alexander, Recessions and the Stock Market (June 25, 2021). Available at SSRN: or

Tim Alexander Kroencke (Contact Author)

University of Neuchatel - Institute of Financial Analysis ( email )

Neuchatel, CH-2000

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