On the Economic Link between Asset Prices and Real Activity

Peña, Juan Ignacio; Rodríguez, Rosa

doi:10.2139/ssrn.726301

On the Economic Link between Asset Prices and Real Activity

33 Pages Posted: 31 Jul 2010

See all articles by Juan Ignacio Peña

Juan Ignacio Peña

Universidad Carlos III de Madrid - Department of Business Administration

Rosa Rodríguez

Universidad Carlos III de Madrid - Department of Business Administration

There are 2 versions of this paper

Date Written: March 2005

Abstract

This paper presents a model linking two financial markets (stocks and bonds) with the real business cycle, in the framework of a CCAPM with GIP preferences. Besides the interest rate term spread, the model includes a new variable to forecast economic activity: the stock market term spread. This is the slope of expected stock market returns. The empirical evidence documented in this paper suggests systematic relationships between the state of the business cycle and the shapes of two yield curves (interest rates and expected stock returns).

Keywords: Stock market, Interest rates, Economic growth

JEL Classification: G12, E44

Suggested Citation: Suggested Citation

Peña, Juan Ignacio and Rodriguez, Rosa, On the Economic Link between Asset Prices and Real Activity (March 2005). Available at SSRN: https://ssrn.com/abstract=726301 or http://dx.doi.org/10.2139/ssrn.726301