Forecasting US stock market returns by the aggressive stock-selection opportunity

Yan Li, Chao Liang and Toan Luu Duc Huynh

Finance Research Letters, 2022, vol. 50, issue C

Abstract: We propose a measurement of aggressive stock-selection opportunity based on positive alphas and idiosyncratic volatilities of cross-section stocks, and examine the role of aggressive stock-selection opportunity in predicting stock market returns. For the US stock market, we find that the change of aggressive stock-selection opportunity has a significant and negative coefficient for predicting future one-month market returns. The out-of-sample results also show the change of aggressive stock-selection opportunity improves the return forecasting performance and increases investors’ economic values. In particular, the predictive information of the change of aggressive stock-selection opportunity is independent of traditional macroeconomic predictors. The economic channel evidence shows that the change of aggressive stock-selection opportunity increases future market volatility and then results in lower market returns.

Keywords: Stock-selection opportunity; Aggressive stock-selection opportunity; Stock market returns; Forecasting returns (search for similar items in EconPapers)
JEL-codes: G12 G14 G23 (search for similar items in EconPapers)
Date: 2022
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (3)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:finlet:v:50:y:2022:i:c:s1544612322005025

DOI: 10.1016/j.frl.2022.103323

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