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Real estate climate index and aggregate stock returns: Evidence from China

Yuexiang Jiang, Tao Fu, Huaigang Long, Adam Zaremba and Wenyu Zhou

Pacific-Basin Finance Journal, 2022, vol. 75, issue C

Abstract: We show that China's real estate climate index (RECI) can be used to forecast the aggregate stock market return. It outperforms popular return predictors both in- and out-of-sample, especially at the monthly horizon. Additionally, RECI's predictive ability is stronger among stocks of small market capitalization and low momentum. For a typical mean-variance investor, RECI's predictive power may provide an additional utility gain of 3.41%. We discuss three potential sources of RECI's predictive ability and present the corresponding evidence, including the cash flow channel, the firm fundamental channel, and the investment substitution channel.

Keywords: Real estate climate index; Return predictability; Asset allocation; Predictive regression; Equity risk premium; Cash flow channel; Firm fundamentals; Substitution effect (search for similar items in EconPapers)
JEL-codes: G12 G14 (search for similar items in EconPapers)
Date: 2022
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DOI: 10.1016/j.pacfin.2022.101841

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