Aggregate Expected Investment Growth and Stock Market Returns

Jun Li, Huijun Wang and Jianfeng Yu
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Jun Li: Asian Development Bank Institute
Huijun Wang: Asian Development Bank Institute
Jianfeng Yu: Asian Development Bank Institute

No 808, ADBI Working Papers from Asian Development Bank Institute

Abstract: Consistent with neoclassical models with investment lags, we find that a bottom-up measure of aggregate investment plans, namely, aggregate expected investment growth, negatively predicts future stock market returns. with an adjusted in-sample R2 of 18.5% and an out-of-sample R2 of 16.3% at the 1-year horizon. The return predictive power is robust after controlling for popular macroeconomic return predictors, in subsample periods, as well as in other G7 countries. Further analyses suggest that the predictive ability of aggregate expected investment growth is more likely to be driven by the time-varying risk premium than by behavioral biases such as extrapolative expectations.

Keywords: aggregate investment plans; market return predictability (search for similar items in EconPapers)
JEL-codes: G12 (search for similar items in EconPapers)
Pages: 47 pages
Date: 2018-02-13
New Economics Papers: this item is included in nep-cfn and nep-sea
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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