Business conditions, monetary policy, and expected security returns

Gerald R. Jensen, Jeffrey M. Mercer, Robert R. Johnson

Research output: Contribution to journalArticlepeer-review

195 Scopus citations


We examine the evidence that expected security returns can be forecasted by the term premium, default premium, and dividend yield, in light of recent findings that similar security return patterns are associated with Federal Reserve monetary policy developments. We extend Fama and French's (1989) analysis by suggesting that the monetary environment influences investors' required returns, and hence the robustness of the models they propose. Our findings indicate that Fama and French's results vary dramatically across monetary environments; that is, the behavior of the business-conditions proxies and their influence on expected security returns is significantly affected by the monetary sector.

Original languageEnglish
Pages (from-to)213-237
Number of pages25
JournalJournal of Financial Economics
Issue number2
StatePublished - Feb 1996


  • Business conditions
  • Expected security returns
  • Monetary policy


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