Conditional Equity Premium and Aggregate Investment: Is the Stock Market a Sideshow?
62 Pages Posted: 21 Aug 2016 Last revised: 2 May 2017
Date Written: May 1, 2017
We document a strong relation between aggregate corporate investment and direct stock market risk measures. Consistent with the investment-based asset pricing model, the comovement with the proxies for conditional equity premium fully accounts for aggregate investment’s predictive power for future stock market returns. Similarly, conditional equity premium is also a significant determinant of classic Tobin’s q measure, although the latter has a much weaker relation with aggregate investment possibly because of its measurement errors. Moreover, the positive relation between aggregate investment and investor sentiment documented in previous studies reflects the fact that both variables correlate closely with conditional equity premium.
Keywords: Investment-Based Asset Pricing Model, Aggregate Corporate Investment, Tobin’s q, Conditional Equity Premium, Market Variance, Aggregate Idiosyncratic Variance, Investor Sentiment
JEL Classification: G10, G12, G3
Suggested Citation: Suggested Citation