The authors thank the anonymous referee who provided astute comments that considerably improved the study. The usual disclaimer applies.
On the Economic Link Between Asset Prices and Real Activity
Article first published online: 20 DEC 2006
Journal of Business Finance & Accounting
Volume 34, Issue 5-6, pages 889–916, June/July 2007
How to Cite
Peña, J. I. and Rodríguez, R. (2007), On the Economic Link Between Asset Prices and Real Activity. Journal of Business Finance & Accounting, 34: 889–916. doi: 10.1111/j.1468-5957.2006.00659.x
- Issue published online: 8 FEB 2007
- Article first published online: 20 DEC 2006
- (Paper received March 2005, revised version accepted August 2006. Online publication December 2006)
- stock market;
- interest rates;
- economic growth;
- term structure
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.