Annals of Finance

, Volume 15, Issue 4, pp 539–561 | Cite as

Business-cycle pattern of asset returns: a general equilibrium explanation

  • Qiang KangEmail author
Research Article


I develop an analytical general-equilibrium model to explain economic sources of business-cycle pattern of aggregate stock market returns. With concave production functions and capital accumulation, a technology shock has a pro-cyclical direct effect and a counter-cyclical indirect effect on expected returns. The indirect effect, reflecting the “feedback” effect of consumers’ behavior on asset returns, dominates the direct effect and causes counter-cyclical variations of expected returns. I show that the conditional mean, volatility, and Sharpe ratios of asset returns all vary counter-cyclically and they are persistent and predictable, and that stock market behavior has forecasting power for real economic activity.


Counter-cyclical variation Capital accumulation Decreasing returns to capital Overlapping-generation model 

JEL Classification

D51 E30 G11 G12 



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Copyright information

© Springer-Verlag GmbH Germany, part of Springer Nature 2019

Authors and Affiliations

  1. 1.Department of FinanceFlorida International UniversityMiamiUSA

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