Procyclical Stocks Earn Higher Returns

45 Pages Posted: 15 Mar 2010 Last revised: 27 Jan 2013

See all articles by William N. Goetzmann

William N. Goetzmann

Yale School of Management - International Center for Finance; National Bureau of Economic Research (NBER)

Akiko Watanabe

University of Alberta - School of Business; University of Alberta - Department of Finance and Statistical Analysis

Masahiro Watanabe

University of Alberta - School of Business; University of Alberta - Department of Finance and Statistical Analysis

Date Written: September 20, 2012

Abstract

We find that procyclical stocks, whose returns comove with business cycles, earn higher average returns than countercyclical stocks. We use a half century of real GDP growth expectations from economists' surveys to determine forecasted economic states. This approach largely avoids the confounding effects of econometric forecasting model error. The loading on the expected real GDP growth rate is a priced risk measure. A fully tradable, ex-ante portfolio formed on this loading generates a procyclicality premium that is statistically significant, economically large, long-lasting over a few years, and independent of the size, book-to-market, and momentum effects.

Keywords: Procyclical and countercyclical stocks, business cycle, scaled factor model, Livingston Survey, investor expectations

JEL Classification: G12

Suggested Citation

Goetzmann, William N. and Watanabe, Akiko and Watanabe, Masahiro, Procyclical Stocks Earn Higher Returns (September 20, 2012). AFA 2011 Denver Meetings Paper, Available at SSRN: https://ssrn.com/abstract=1570705 or http://dx.doi.org/10.2139/ssrn.1570705

William N. Goetzmann (Contact Author)

Yale School of Management - International Center for Finance ( email )

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National Bureau of Economic Research (NBER)

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Akiko Watanabe

University of Alberta - School of Business ( email )

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University of Alberta
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Canada
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780-492-3325 (Fax)

HOME PAGE: http://www.bus.ualberta.ca/awatanabe

University of Alberta - Department of Finance and Statistical Analysis ( email )

2-32C Business Building
Edmonton, Alberta T6G 2R6
Canada

HOME PAGE: http://www.bus.ualberta.ca/awatanabe

Masahiro Watanabe

University of Alberta - School of Business ( email )

School of Business - FMS
University of Alberta
Edmonton, Alberta T6G 2R6
Canada
780-492-7343 (Phone)
780-492-3325 (Fax)

HOME PAGE: http://www.ualberta.ca/~masa/

University of Alberta - Department of Finance and Statistical Analysis ( email )

2-32C Business Building
Edmonton, Alberta T6G 2R6
Canada

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