Correlation of Business Cycle and Asset Allocation

Volatility characteristics in the economic development urge economists to be more and more interested in the business cycle. As for synchronicity of business cycle and economic variables, comovement among consumption, investment, net export and output have been already confirmed by real business cycle theory. This paper focuses on the close relationship of the financial assets and the real economy, and analyzes the investment strategy of assets in the business cycle by literature analysis and empirical research. Investor's psychology is one of the explanations that argue business cycle may affect asset pricing. Business cycle can not only exert influence on investment decisions by investor's psychology deviation, but also affect the production and investment decisions of firms through economic fundamentals. Deep understanding of the investment behavior in the capital markets by grasping variety of leading economic indicators and synchronization indicators may contribute to develop optimal asset pricing and investment strategies, and maximize their return on interest.