Recessions and the Stock Market

56 Pages Posted: 30 Apr 2018 Last revised: 15 Jan 2019

See all articles by Tim Alexander Kroencke

Tim Alexander Kroencke

University of Neuchatel - Institute of Financial Analysis

Date Written: January 14, 2019


Why do stock prices fall more sharply than dividends around recessions? One explanation could be that stock prices fall in anticipation of low future cash flows. Against conventional wisdom, I do not find empirical evidence for such a channel. Alternatively, prices might drop a lot because expected future returns are high. I find that stock price volatility increases substantially more than cash flow volatility during recessions, which suggests that large changes in the price of risk play a key role. I argue that standard calibrations of theoretical asset pricing models have difficulties in explaining the stock market around recessions.

Keywords: Recessions, Stock Market, Consumption-Based Asset Pricing, Long-Run Risks, Habits, Volatility

JEL Classification: G12

Suggested Citation

Kroencke, Tim Alexander, Recessions and the Stock Market (January 14, 2019). Available at SSRN: or

Tim Alexander Kroencke (Contact Author)

University of Neuchatel - Institute of Financial Analysis ( email )

Neuchatel, CH-2000

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