Business conditions and expected returns on stocks and bonds☆

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Abstract

Expected returns on common stocks and long-term bonds contain a term or maturity premium that has a clear business-cycle pattern (low near peaks, high near troughs). Expected returns also contain a risk premium that is related to longer-term aspects of business conditions. The variation through time in this premium is stronger for low-grade bonds than for high-grade bonds and stronger for stocks than for bonds. The general message is that expected returns are lower when economic conditions are strong and higher when conditions are weak.

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    ☆

    The comments of John Cochrane, Bradford Cornell, Kevin Murphy, Richard Roll, G. William Schwert (the editor), and John Campbell (the referee) are gratefully acknowledged. This research is supported by the National Science Foundation (Fama) and the Center for Research in Security Prices (French).

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    Copyright © 1989 Published by Elsevier B.V.