Financial and Business Cycle Risk Premia: Yifan Ma, Rotterdam School of Management

Event Date: 12 November 2025

Speaker: Yifan Ma

Venue: CW404b, Cathedral Wing, Strathclyde Business School

Time: 2pm

Abstract:

I estimate financial and business cycles using a regime-switching state-space model, applied respectively to cross-sectional financial variables and macroeconomic aggregates. Analysing US equity excess returns with OLS regressions and a structural vector autoregression (SVAR) framework, I uncover two key insights. First, financial cycle risk premia diverge fundamentally from business cycle risk premia. While the business cycle premia are countercyclical, financial cycle shocks drive persistent repricing effects. Favorable financial conditions consistently forecast higher subsequent quarter returns. In contrast, the predictability of macro conditions emerges primarily in adverse states. Second, the “financial accelerator mechanism” appears
asymmetric. Positive macro shocks lead to higher financial stress in subsequent quarters, whereas favorable financial shocks generate sustained improvements in macroeconomic performance. My results challenge the notion that financial cycles are merely secondary reflections of business cycles, highlighting instead endogenous financial dynamics and consistent pricing effects.

Published: 11 November 2025