The purpose of this project is analyze the behavior of asset prices, the nature of economic fluctuations, and the links between asset markets and the macroeconomy. The project consists of three major components. The first relates the pattern of unconditional mean asset returns to the covariances of asset returns with news about current and future stock returns and labor income. The second part of the project focuses on the behavior of conditional mean asset returns. It is well known that stock prices tend to fall when the economy enters a recession. This part of the project will investigate habit formation and risk aversion behavior on part of investors over the business cycle. The third component of the project explores new directions in macroeconomics including the role of home production technology in real business cycle models, the nature of exogenous shocks to monetary policy, and the use of growth theory to in estimating trend components of output. This research is important because it will provide a deeper understanding of the interaction between the stock market and the business cycle.
