Idiosyncrasy as a Leading Indicator

Randall Morck, Bernard Yeung and Lu Y. Zhang

Journal of Financial and Quantitative Analysis, 2023, vol. 58, issue 8, 3547-3576

Abstract: Disequilibrating macro shocks affect different firms’ prospects differently, increasing idiosyncratic variation in forward-looking stock returns before affecting economic growth. Consistent with most such shocks from 1947 to 2020 enhancing productivity, increased idiosyncratic stock return variation forecasts next-quarter real GDP growth, industrial production growth, and consumption growth both in-sample and out-of-sample. These effects persist after controlling for other leading economic indicators.

Date: 2023
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