tailieunhanh - Stock Returns and Expected Business Conditions: Half a Century of Direct Evidence

At acquisition an entity must classify a security within the scope of ASC 320 into one of three categories: trading, available-for-sale or held-to-maturity. The category designation of each security will determine the measurement basis (., amortized cost versus fair value) of the security and how it will be presented and disclosed in the financial statements. As entities decide on investment classifications, they should consider how those decisions may affect future business plans or opportunities. For example, an entity should consider the possibility that it might have to sell some of its securities to take advantage of a potential future. | Stock Returns and Expected Business Conditions Half a Century of Direct Evidence Sean D. Campbell Francis X. Diebold Federal Reserve Board University of Pennsylvania and NBER May 2005 This Draft Print December 27 2007 Abstract Using half a century of Livingston survey data on expected business conditions we characterize directly the impact of expected business conditions on expected excess stock returns. Expected business conditions consistently affect expected excess returns in a statistically and economically significant counter-cyclical fashion Depressed expected business conditions are associated with high expected excess returns. Moreover inclusion of expected business conditions in otherwise-standard predictive return regressions substantially reduces the explanatory power of the conventional financial predictors including the dividend yield default premium and term premium while simultaneously increasing R 2. Expected business conditions retain predictive power even after controlling for an important and recently introduced non-financial predictor the generalized consumption wealth ratio which accords with the view that expected business conditions play a role in asset pricing different from and complementary to that of the consumption wealth ratio. We argue that time-varying expected business conditions likely capture time-varying risk while time-varying consumption wealth may capture time-varying risk aversion. Key Words Business cycle expected equity returns prediction Livingston survey risk aversion equity premium risk premium JEL Code G12 Acknowledgments For invaluable guidance we thank the Editor the Associate Editor and three referees. For support we thank the Humboldt Foundation the Guggenheim Foundation the National Science Foundation and the Wharton Financial Institutions Center. For helpful comments we thank seminar participants at the Board of Governors of the Federal Reserve System and the Swiss National Bank Study Center Gerzensee as well as .

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