Aggregate Expected Investment Growth and Stock Market Returns

A bottom-up measure of aggregate investment plans, namely, aggregate expected investment growth (AEIG) can negatively predict market returns. At the one-year horizon, the adjusted in-sample R-square is 18.2% and the out-of-sample R-square is 14.4%. The return predictive power is robust after controlling for standard macroeconomic return predictors and proxies for investor sentiment. Further analyses suggest that the predictive ability of AEIG is at least partially driven by the time-varying risk premium. These findings lend support to neoclassical models with investment lags.

Keywords: investment plan, investment lags, time-varying risk premium, investor sentiment, stock market prediction

JEL Classification: G12

Suggested Citation: Suggested Citation

Li, Jun and Wang, Huijun and Yu, Jianfeng, Aggregate Expected Investment Growth and Stock Market Returns (April 1, 2018). Asian Finance Association (AsianFA) 2018 Conference, 29th Annual Conference on Financial Economics & Accounting 2018, PBCSF-NIFR Research Paper, Journal of Monetary Economics, Forthcoming, Available at SSRN: https://ssrn.com/abstract=2972030 or http://dx.doi.org/10.2139/ssrn.2972030