Aggregate Expected Investment Growth and Stock Market Returns
61 Pages Posted: 22 May 2017 Last revised: 29 Oct 2020
Date Written: April 1, 2018
A bottom-up measure of aggregate investment plans, namely, aggregate expected investment growth (AEIG) can negatively predict market returns. At the one-year horizon, the adjusted in-sample R-square is 18.2% and the out-of-sample R-square is 14.4%. The return predictive power is robust after controlling for standard macroeconomic return predictors and proxies for investor sentiment. Further analyses suggest that the predictive ability of AEIG is at least partially driven by the time-varying risk premium. These findings lend support to neoclassical models with investment lags.
Keywords: investment plan, investment lags, time-varying risk premium, investor sentiment, stock market prediction
JEL Classification: G12
Suggested Citation: Suggested Citation