Aggregate Expected Investment Growth and Stock Market Returns

47 Pages Posted: 8 Jun 2018

See all articles by Jun Li

Jun Li

University of Texas at Dallas

Huijun Wang

University of Delaware

Jianfeng Yu

Tsinghua University

Multiple version iconThere are 2 versions of this paper

Date Written: February 13, 2018

Abstract

Consistent with neoclassical models with investment lags, we find that a bottom-up measure of aggregate investment plans, namely, aggregate expected investment growth, negatively predicts future stock market returns. with an adjusted in-sample R2 of 18.5% and an out-of-sample R2 of 16.3% at the 1-year horizon. The return predictive power is robust after controlling for popular macroeconomic return predictors, in subsample periods, as well as in other G7 countries. Further analyses suggest that the predictive ability of aggregate expected investment growth is more likely to be driven by the time-varying risk premium than by behavioral biases such as extrapolative expectations.

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 (February 13, 2018). ADBI Working Paper 808. Available at SSRN: https://ssrn.com/abstract=3191746 or http://dx.doi.org/10.2139/ssrn.3191746

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 Delaware ( email )

Newark, DE 19711
United States

Jianfeng Yu

Tsinghua University ( email )

Beijing, 100084
China

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