Real estate climate index and aggregate stock returns: Evidence from China
Adam Zaremba and
Pacific-Basin Finance Journal, 2022, vol. 75, issue C
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)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:pacfin:v:75:y:2022:i:c:s0927538x22001366
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