Recessions and the Stock Market
60 Pages Posted: 30 Apr 2018 Last revised: 17 Oct 2019
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: Suggested Citation