Late to Recessions: Stocks and the Business Cycle

Gomez Cram, R (2022) Late to Recessions: Stocks and the Business Cycle. Journal of Finance, 77 (2). pp. 923-966. ISSN 0022-1082


I find that returns are predictably negative for several months after the onset of recessions, becoming high only 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 strategy exploiting this pattern produces positive alphas. Using analyst forecast data, I show that my findings are consistent with investors' slow reaction to recessions. When expected returns are negative, analysts are too optimistic and their downward expectation revisions are exceptionally high.

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Item Type: Article
Subject Areas: Finance
Date Deposited: 24 Jan 2023 09:13
Last Modified: 20 Apr 2024 01:53
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