45 Pages Posted: 15 Mar 2010 Last revised: 27 Jan 2013
Date Written: September 20, 2012
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: 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