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On the Economic Link Between Asset Prices and Real Activity
Author(s) -
Peña Juan Ignacio,
Rodríguez Rosa
Publication year - 2007
Publication title -
journal of business finance and accounting
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.282
H-Index - 77
eISSN - 1468-5957
pISSN - 0306-686X
DOI - 10.1111/j.1468-5957.2006.00659.x
Subject(s) - economics , stock (firearms) , capital asset pricing model , business cycle , yield curve , interest rate , stock market , econometrics , financial economics , bond , stock market bubble , rendleman–bartter model , consumption based capital asset pricing model , financial market , monetary economics , finance , macroeconomics , mechanical engineering , paleontology , horse , biology , engineering
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.