BUSINESS CONDITIONS, MONETARY-POLICY, AND EXPECTED SECURITY RETURNS

We examine the evidence that expected security returns can be forecast ed by the term premium, default premium, and dividend yield, in light of recent findings that similar security return patterns are associate d with Federal Reserve monetary policy developments. We extend Fama an d French's (1989) analysis by suggesting that the monetary environment influences investors' required returns, and hence the robustness of t he models they propose. Our findings indicate that Fama and French's r esults vary dramatically across monetary environments; that is, the be havior of the business-conditions proxies and their influence on expec ted security returns is significantly affected by the monetary sector.