On the Economic Link Between Asset Prices and Real Activity

28 Pages Posted: 11 Jul 2007

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

Multiple version iconThere are 2 versions of this paper

Abstract

This paper presents a model linking two financial markets (stocks and bonds) with real business cycle, in the framework of the Consumption Capital Asset Pricing Model with Generalized Isoelastic Preferences. Besides interest rate term spread, the model includes a new variable to forecast economic activity: stock market term spread. This is the slope of expected stock market returns. The empirical evidence documented in this paper suggests systematic relationships between business cycle's state and the shapes of two yield curves (interest rates and expected stock returns). Results are robust to changes in measures of economic growth, stock prices, interest rates and expectations generating mechanisms.

JEL Classification: G12, E32, E43

Suggested Citation

Peña, Juan Ignacio and Rodriguez, Rosa, On the Economic Link Between Asset Prices and Real Activity. Journal of Business Finance & Accounting, Vol. 34, Nos. 5-6, pp. 889-916, June/July 2007. Available at SSRN: https://ssrn.com/abstract=999776 or http://dx.doi.org/10.1111/j.1468-5957.2006.00659.x

Juan Ignacio Peña

Universidad Carlos III de Madrid - Department of Business Administration ( email )

Calle Madrid 126
Getafe, Madrid, Madrid 28903
Spain
34 91 624 9625 (Phone)
34 91 624 9608 (Fax)

Rosa Rodriguez (Contact Author)

Universidad Carlos III de Madrid - Department of Business Administration ( email )

Calle Madrid 126
Getafe, Madrid, Madrid 28903
Spain

HOME PAGE: http://www.business.uc3m.es/en/faculty/profesor/perfil/42

Register to save articles to
your library

Register

Paper statistics

Downloads
13
Abstract Views
1,094
PlumX Metrics