Contrarian flows, consumption and expected stock returns

Yuzhao Zhang

Journal of Banking & Finance, 2014, vol. 42, issue C, 101-111

Abstract: We investigate the relation between contrarian flows, consumption growth, and market risk premium. We construct a contrarian flows measure by summing up the capital flows to stocks that go against the total flow of the aggregate market. We show that the contrarian flows are negatively influenced by the same-quarter consumption growth. During bad times, the majority of investors who are affected by the negative shock reduce their equity exposure, and these extra supplies of risky assets are absorbed by contrarian investors who are least affected by the consumption shock. Using quarterly stock market data, we find that the contrarian flows forecast market returns at short-to-intermediate horizons. The predictability stems from the component that is explained by the consumption growth, and therefore the consumption growth contains valuable information about the market risk premium. Moreover, the predictability is stronger for growth stocks than for value stocks, and hence it negatively predicts the value premium. This is because the contrarian flows measure the market risk premium and growth stocks bear more discount rate risk than value stocks. Out-of-sample tests show that the main results are robust to data-snooping bias.

Keywords: Return predictability; Consumption growth; Institutional investor (search for similar items in EconPapers)
JEL-codes: E21 G12 G17 (search for similar items in EconPapers)
Date: 2014
References: View references in EconPapers View complete reference list from CitEc
Citations:

Downloads: (external link)
http://www.sciencedirect.com/science/article/pii/S0378426614000375
Full text for ScienceDirect subscribers only

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:eee:jbfina:v:42:y:2014:i:c:p:101-111

DOI: 10.1016/j.jbankfin.2014.01.023

Access Statistics for this article

Journal of Banking & Finance is currently edited by Ike Mathur

More articles in Journal of Banking & Finance from Elsevier
Bibliographic data for series maintained by Catherine Liu ().