DP7227 The Equity Premium and the Business Cycle: the Role of Demand and Supply Shocks

Author(s): Peter N Smith, Steffen Sorensen, Michael R. Wickens
Publication Date: March 2009
Keyword(s): business cycles, demand and supply shocks, equity premium, stock returns
JEL(s): C32, C51, E44, G12
Programme Areas: International Macroeconomics, Financial Economics
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=7227

This paper explores the effects of the US business cycle on US stock market returns through an analysis of the equity risk premium. We propose a new methodology based on the SDF approach to asset pricing that allows us to uncover the different effects of aggregate demand and supply shocks. We find that negative shocks are more important that positive shocks, and that supply shocks have a much greater impact than demand shocks.