On the contributions of this study

Abstract

This study has reported many figures and tables. Hopefully, the big picture has not been lost in too much formalism and technicalities. The goal of this book has been to explore the interplay between time varying expected returns, consumption, and the business cycle on global stock markets. The main idea that has come up again and again is that expected returns vary with the business cycle. In a nutshell, if the time variation in expected returns is rational, driven by shocks to taste or technology, then the variation in expected returns should be related to variation in consumption, investment, and savings. In this sense, predictability of stock returns is perfectly consistent with the concept of market efficiency, and stock prices need not follow a random walk. This notion is empirically tested using different methodologies. In particular, the study starts with simple linear regressions, extracts business cycle components from macroeconomic time series, tests both beta pricing and stochastic discount factor models in their unconditional as well as conditional versions and, finally, simulates a slightly adapted version of the Lucas (1978) endowment economy. The examination includes quarterly and monthly data of both developed and emerging stock markets starting in the early 1970s (if available). Returns are all denominated in Swiss francs.