Procyclical Stocks Earn Higher Returns

This paper is an extensive revision and update of a 2013 working paper entitled “Investor Expectations, Business Conditions, and the Pricing of Beta-Instability Risk.” For comments on the earlier working paper we thank Nai-fu Chen, Francis Diebold, Gustavo Grullon, Isao Ishida, Barbara Ostdiek, Bradley Paye, Ralitsa Petkova, Peter Pope, Richard Priestley, Jay Shanken, Hitoshi Takehara, Clara Vega and James Weston. We thank session participants at the American Finance Association Meetings, European Finance Association Meetings, the Lone Star Finance Symposium, and the Nippon (Japanese) Finance Association Meetings. We also thank session participants at the BI Norwegian Business School, Simon Fraser University, University of Oxford, University of New South Wales, University of Technology Sydney, University of Sydney, Arizona State University, Indiana University, INQUIRE UK, Michigan State University, Rice University, University of Alberta, and University of Texas at Austin. Special thanks go to Ravi Jagannathan for detailed suggestions and discussions that helped us improve the paper. All errors are our own. Part of this research was conducted while the third author was at Rice University and the second and third authors were visiting Yale School of Management. We thank the Scott Schoen Fellowship for financial support. The views expressed herein are those of the authors and do not necessarily reflect the views of the National Bureau of Economic Research.