Aggregate Expected Investment Growth and Stock Market Returns

56 Pages Posted: 22 May 2017 Last revised: 20 Nov 2018

See all articles by Jun Li

Jun Li

University of Texas at Dallas

Huijun Wang

University of Melbourne

Jianfeng Yu

Tsinghua University - PBC School of Finance

Multiple version iconThere are 2 versions of this paper

Date Written: April 1, 2018

Abstract

We propose a bottom-up measure of aggregate investment plans, namely, aggregate expected investment growth (AEIG). We find that AEIG negatively predicts future market returns, with an adjusted in-sample R-square of 18.5% and an out-of-sample R-square of 16.3% at the one-year horizon. The return predictive power is robust after controlling for popular macroeconomic return predictors and standard proxies for investor sentiment, in subsample periods, as well as in other G7 countries. Further analyses suggest that the predictive ability of AEIG is at least partially driven by the time-varying risk premium. Our findings lend support to neoclassical models with investment lags.

Keywords: Aggregate investment plans, market return predictability

JEL Classification: G12

Suggested Citation

Li, Jun and Wang, Huijun and Yu, Jianfeng, Aggregate Expected Investment Growth and Stock Market Returns (April 1, 2018). Asian Finance Association (AsianFA) 2018 Conference; 29th Annual Conference on Financial Economics & Accounting 2018. Available at SSRN: https://ssrn.com/abstract=2972030 or http://dx.doi.org/10.2139/ssrn.2972030

Jun Li (Contact Author)

University of Texas at Dallas ( email )

800 West Campbell Road, SM 31
Richardson, TX 75080
United States
972-883-4422 (Phone)

Huijun Wang

University of Melbourne

198 Berkeley Street
Carlton, Victoria 3053
Australia

Jianfeng Yu

Tsinghua University - PBC School of Finance ( email )

No. 43, Chengdu Road
Haidian District
Beijing 100083
China

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