Late to Recessions: Stocks and the Business Cycle

78 Pages Posted: 28 Sep 2020

Date Written: January 2020


I find that returns are predictably negative for several months after the onset of recessions, and only become high thereafter. I identify business-cycle turning points by estimating a state-space model using macroeconomic data. Conditioning on the business cycle further reveals that returns exhibit momentum in recessions, whereas in expansions they display the mild reversals expected from discount rate changes. A market timing strategy that optimally exploits this business-cycle pattern produces a 60% increase in the buy-and-hold Sharpe ratio. I find that a subset of hedge funds add value for their clients in part by avoiding stock market crashes during recessions.

Keywords: equity risk premia, business cycles

JEL Classification: G11, G12, G41

Suggested Citation

Gomez Cram, Roberto, Late to Recessions: Stocks and the Business Cycle (January 2020). Available at SSRN: or

Roberto Gomez Cram (Contact Author)

London Business School ( email )

Regent's Park, London NW1 4SA
Regent's Park
London, London NW1 4SA
United Kingdom

Here is the Coronavirus
related research on SSRN

Paper statistics

Abstract Views
PlumX Metrics