Abstract

http://ssrn.com/abstract=1094560
 
 

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State-Level Business Cycles and Local Return Predictability


George M. Korniotis


University of Miami

Alok Kumar


University of Miami - School of Business Administration

March 6, 2012

Journal of Finance, Forthcoming

Abstract:     
This study examines whether local stock returns vary with local business cycles in a predictable manner. Our key conjecture is that local stock prices would decline and the average future returns would rise during local recessions as local risk aversion increases and local risk sharing abilities decline. Consistent with this conjecture, we find that U.S. state portfolios earn higher future returns when state-level unemployment rates are higher and housing collateral ratios are lower. During the 1978 to 2009 period, geography-based trading strategies that exploit this predictable pattern earn an annualized risk-adjusted performance of about five percent. This abnormal performance can be attributed to time-varying portfolio exposures to U.S. systematic risk factors and mispricing generated by coordinated local trading. Consistent with the mispricing explanation, the evidence of predictability is stronger among firms with low visibility and high local ownership. Nonlocal domestic and foreign investors arbitrage away the predictable patterns in local returns in about a year.

Number of Pages in PDF File: 89

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Date posted: February 19, 2008 ; Last revised: April 20, 2012

Suggested Citation

Korniotis, George M. and Kumar, Alok, State-Level Business Cycles and Local Return Predictability (March 6, 2012). Journal of Finance, Forthcoming. Available at SSRN: http://ssrn.com/abstract=1094560 or http://dx.doi.org/10.2139/ssrn.1094560

Contact Information

George M. Korniotis
University of Miami ( email )
P.O. Box 248094
Coral Gables, FL 33124-6552
United States
305-284-5728 (Phone)
Alok Kumar (Contact Author)
University of Miami - School of Business Administration ( email )
514 Jenkins Building
Department of Finance
Coral Gables, FL 33124-6552
United States
305-284-1882 (Phone)
HOME PAGE: http://moya.bus.miami.edu/~akumar
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