The market cost of business cycle fluctuations

Ghosh, Anisha, Julliard, Christian ORCID: 0000-0001-8177-7441 and Stutzer, Michael J. (2024) The market cost of business cycle fluctuations. Management Science. ISSN 0025-1909 (In Press)

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Abstract

We propose a novel approach to measure the cost of aggregate economic fluctuations, that does not require complete specification of investors’ risk preferences or their beliefs. With data on consumption and asset prices, an information-theoretic method is used to recover an information kernel (I-SDF). The I-SDF accurately prices broad cross-sections of assets, thereby offering a reliable candidate for the measurement of the welfare cost of business cycles. Our method enables the estimation of both the unconditional (or, average) cost of fluctuations as well as the cost conditional on each possible economic state. We find that the cost of fluctuations is strongly time-varying and countercyclical and that the cost of business cycle fluctuations is substantial, accounting for a quarter to a third of the cost of all consumption uncertainty

Item Type:	Article
Additional Information:	© 2024
Divisions:	Finance
Subjects:	H Social Sciences > HG Finance H Social Sciences > HD Industries. Land use. Labor > HD28 Management. Industrial Management H Social Sciences > HB Economic Theory
JEL classification:	E - Macroeconomics and Monetary Economics > E3 - Prices, Business Fluctuations, and Cycles > E30 - General E - Macroeconomics and Monetary Economics > E2 - Consumption, Saving, Production, Employment, and Investment > E20 - General G - Financial Economics > G1 - General Financial Markets > G12 - Asset Pricing; Trading volume; Bond Interest Rates C - Mathematical and Quantitative Methods > C5 - Econometric Modeling > C50 - General
Date Deposited:	22 Nov 2024 15:30
Last Modified:	12 Dec 2024 04:35
URI:	http://eprints.lse.ac.uk/id/eprint/126153

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