Conditional Equity Premium and Aggregate Investment: Is the Stock Market a Sideshow?

62 Pages Posted: 27 Mar 2017 Last revised: 2 May 2017

See all articles by Hui Guo

Hui Guo

University of Cincinnati - Department of Finance - Real Estate

Buhui Qiu

University of Sydney Business School; Financial Research Network (FIRN)

Multiple version iconThere are 2 versions of this paper

Date Written: May 1, 2017

Abstract

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

Guo, Hui and Qiu, Buhui, Conditional Equity Premium and Aggregate Investment: Is the Stock Market a Sideshow? (May 1, 2017). Available at SSRN: https://ssrn.com/abstract=2940884 or http://dx.doi.org/10.2139/ssrn.2940884

Hui Guo

University of Cincinnati - Department of Finance - Real Estate ( email )

College of Business
418 Carl H. Lindner Hall
Cincinnati, OH 45221
United States
513.556.7077 (Phone)
513.556.0979 (Fax)

HOME PAGE: http://homepages.uc.edu/~guohu/

Buhui Qiu (Contact Author)

University of Sydney Business School ( email )

Room 513, The Codrington Building
The University of Sydney
Sydney, NSW 2006
Australia
+61 2 9036 6435 (Phone)
+61 2 9351 6461 (Fax)

HOME PAGE: http://sydney.edu.au/business/staff/buhuiq

Financial Research Network (FIRN)

C/- University of Queensland Business School
St Lucia, 4071 Brisbane
Queensland
Australia

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