Aggregate Expected Investment Growth and Stock Market Returns
56 Pages Posted: 22 May 2017 Last revised: 20 Nov 2018
Date Written: April 1, 2018
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: Suggested Citation