Recessions and the Stock Market

60 Pages Posted: 30 Apr 2018 Last revised: 17 Oct 2019

See all articles by Tim Alexander Kroencke

Tim Alexander Kroencke

University of Neuchatel - Institute of Financial Analysis

Date Written: October 17, 2019


Why do stock prices fall more sharply than dividends around recessions? One possible explanation is that stock prices fall in anticipation of low future cash flows. I find that prices and cash flows drop contemporaneously, which speaks against such a channel. Alternatively, prices drop because expected returns are rising. I find that price volatility increases substantially more than cash flow volatility during recessions, which suggests that changes in the price of risk play an important role. These results allow for a fresh empirical assessment of competing asset pricing theories.

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

JEL Classification: G12

Suggested Citation

Kroencke, Tim Alexander, Recessions and the Stock Market (October 17, 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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