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New Orders and Asset Prices

53 Pages Posted: 30 Mar 2009 Last revised: 5 Oct 2011

Christopher S. Jones

University of Southern California - Marshall School of Business - Finance and Business Economics Department

Selale Tuzel

University of Southern California - Marshall School of Business - Finance and Business Economics Department

Date Written: October 2011

Abstract

This paper investigates the asset pricing and macroeconomic implications of the ratio of new orders (NO) to shipments (S) of durable goods. NO/S is a measure of investment commitments by firms, and high values of NO/S are associated with a business cycle peak. High NO/S predicts a short-run increase in output, mainly from equipment and inventory investment, but a dramatic long-run decline in fixed investment, inventories, and GDP growth. We find that NO/S proxies for a short-horizon component of risk premia that is not captured by the predictive variables identified in prior work. Higher levels of NO/S forecast lower excess returns on a broad set of assets, including equities, long- and intermediate-term Treasury bonds, and highand low-grade corporate bonds, at horizons from one month to one year. For stocks, and to some extent for bonds, these effects are robust to the inclusion of common return predictors. For all assets, predictability is significant on an out-of-sample basis as well. We also address the term structure of risk premia. To measure longer term investment commitment, we construct a similar ratio based on construction starts and show that it proxies for long term risk premia, predicting stock and bond returns primarily at longer horizons.

Keywords: New Orders, Return Predictability, Time-Varying Risk Premia, Business Cycles, Time to Plan

JEL Classification: G12, E32, E44

Suggested Citation

Jones, Christopher S. and Tuzel, Selale, New Orders and Asset Prices (October 2011). Available at SSRN: https://ssrn.com/abstract=1364872 or http://dx.doi.org/10.2139/ssrn.1364872

Christopher S. Jones

University of Southern California - Marshall School of Business - Finance and Business Economics Department ( email )

Marshall School of Business
Los Angeles, CA 90089
United States

Selale Tuzel (Contact Author)

University of Southern California - Marshall School of Business - Finance and Business Economics Department ( email )

Marshall School of Business
Los Angeles, CA 90089
United States

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