Gabriel Perez-Quiros

Firm Size and Cyclical Variations in Stock Returns

Recent imperfect capital market theories predict the presence of asymmetries in the variation of small and large firms risk over the economic cycle. Small firms with little collateral should be more strongly affected by tighter credit market conditions in a recession state than large, better collateralized ones. This paper adopts a flexible econometric model to analyze these mplications empirically. Consistent with theory, small firms display the highest degree of asymmetry in their risk across recession and expansion states, which translates into a higher sensitivity of their expected stock returns with respect to variables that measure credit market conditions. Copyright The American Finance Association 2000.

Business cycle asymmetries in stock returns: evidence from higher order moments and conditional densities

Markow switching models with time-varying means, variances and mixing weights are applied to characterise business cycle variation in the probability distribution and higher order moments of stock returns. This allows us to provide a comprehensive characterization of risk that goes well beyond the mean and variance of returns. Several mixture models with different specifications of the state transition are compared and we propose a new mixture of Gaussian and student-t distributions that captures outliers in returns. The models produce very similar expected returns and volatilities but imply very different time series for conditional skewness, kurtosis and predictive density. Consistent with economic theory, the gains in predictive accuracy from considering two-state mixture models rather than a single-state specification are higher for small firms than for large firms. JEL Classification: C22, C52

Variations in the mean and volatility of stock returns around turning points of the business cycle

Publisher Summary Predictability of the mean and volatility of stock returns over the course of the business cycle have generated considerable interest in the financial community. This chapter studies the patterns and magnitude of variations in the mean and volatility of US stock returns around turning points of the business cycle. During the brief spell from the peak to the trough of the postwar business cycle, mean excess returns increased by approximately 40% in annualized terms. Volatility of stock returns peaked for the period leading official recessions by a single month and was 50% higher in recessions than in expansions. Based on conditioning information such as lagged interest rates and dividend yields, the existing literature on predictability of the mean and volatility of stock returns provides indirect evidence on the existence of a business cycle component in expected stock returns.