We show that macroeconomic growth at the end of the year (fourth quarter or December) strongly influences expected returns on risky financial assets, whereas economic growth during the rest of the year does not. We find this pattern for many different asset classes, across different time periods, and for US and international data. We also show that movements in the surplus consumption ratio of Campbell and Cochrane (1999), a theoretically well-founded measure of time-varying risk aversion linked to macroeconomic growth, influence expected returns stronger during the fourth quarter than the other quarters of the year. Our findings suggest that expected returns, risk aversion, and economic growth are particularly related at the end of the year, when we also expect consumers׳ portfolio adjustments to be concentrated.
Most financial economists would probably agree that
economic growth should matter for expected returns. In a
recession, for instance, investors are reluctant to take on
risk pushing up expected returns on risky assets (Campbell
and Cochrane, 1999). Empirically, however, establishing a
robust link between time series movements in economic
growth and expected returns has been difficult. A fore
casting regression of next year's return from the US stock
market in excess of the risk-free rate (Re) on US real
seasonally adjusted gross domestic product (GDP) growth
(GGDP) of this quarter, using quarterly observations since
1947, illustrates this:
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