Asymmetric Stock - Market Volati

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					      "Asymmetric Stock-Market Volatility and the
        Cyclical Behavior of Expected Returns"

                           Antonio Mele
                    London School of Economics


Recent explanations of aggregate stock-market fluctuations suggest that
countercyclical stock-market volatility is consistent with rational asset
evaluations. I argue that the rationale behind this result is poorly understood,
and develop a framework to uncover its foundations. I find that countercyclical
risk-premia do not imply countercyclical returns volatility. To activate
countercyclical volatility, risk-premia must increase more in bad times than
they decrease in good times - thereby inducing price-dividend ratios to
fluctuate more in bad times than in good times. The business cycle
asymmetry in the investors' attitude to discount future cash-flows plays a
novel critical role in many rational explanations of asset price fluctuations.