Asset Growth and Stock Market Returns: A Time-Series Analysis

Review of Finance, Forthcoming

38 Pages Posted: 6 Apr 2014 Last revised: 15 Jun 2018

See all articles by Quan Wen

Quan Wen

Georgetown University - Department of Finance

Date Written: October 1, 2017

Abstract

I find that aggregate asset growth constructed from bottom-up data negatively predicts future market returns both in and out-of-sample and this result is robust across G7 countries. I further show that aggregate asset growth contains information about future market returns not captured by traditional macroeconomic variables and other measures of investment or growth. The forecasting ability of asset growth is strongly correlated with its propensity to predict more optimistic analyst forecasts and subsequent downward revisions, earnings surprise, and systematic errors in investors' expectations. The time varying risk premium also appears key in explaining the documented return predictability.

Keywords: Asset growth, return predictability, time-varying risk premium, forecast errors, extrapolation

JEL Classification: G12, G14

Suggested Citation

Wen, Quan, Asset Growth and Stock Market Returns: A Time-Series Analysis (October 1, 2017). Review of Finance, Forthcoming. Available at SSRN: https://ssrn.com/abstract=2420467 or http://dx.doi.org/10.2139/ssrn.2420467

Quan Wen (Contact Author)

Georgetown University - Department of Finance ( email )

37th and O Street, NW
Washington D.C., DC 20057
United States

HOME PAGE: http://faculty.georgetown.edu/qw50

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