Late to Recessions: Stocks and the Business Cycle

I find that returns are predictably negative for several months after the onset of recessions, and only become high 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 market timing strategy that optimally exploits this business-cycle pattern produces a 60% increase in the buy-and-hold Sharpe ratio. I find that a subset of hedge funds add value for their clients in part by avoiding stock market crashes during recessions.

• Publication year

  2021

• Venue

  Social Science Research Network

• Publication date

  2021-12-11

• Fields of study

  Business, Economics

• Identifiers
  DOI 10.2139/ssrn.3671346
• External record

  Open on Semantic Scholar

• Source metadata

  Semantic Scholar

• No claims are published for this paper.

• No concepts are published for this paper.

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