Aggregate Expected Investment Growth and Stock Market Returns

61 Pages Posted: 22 May 2017 Last revised: 29 Oct 2020

See all articles by Jun Li

Jun Li

University of Texas at Dallas

Huijun Wang

Auburn University; 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

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

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, PBCSF-NIFR Research Paper, Journal of Monetary Economics, Forthcoming, 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

Auburn University ( email )

415 West Magnolia Avenue
Auburn, AL 36849
United States

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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