Forecasting Individual Stock Returns Using Macroeconomic and Technical Variables
37 Pages Posted: 13 Mar 2019 Last revised: 25 Mar 2020
Date Written: July 25, 2017
We show that the previously documented predictability of macroeconomic and technical variables for market returns is also evident in individual stock returns. Technical variables generate better predictability on firms with higher limits to arbitrage (smaller, illiquid, volatile firms), while macroeconomic variables better predict firms with lower limits to arbitrage. Technical predictors show stronger predictive power for high limits to arbitrage firms across the business cycle, whereas macroeconomic variables capture more predictive information for firms with low limits to arbitrage during recessions.
Keywords: firm level predictability, macroeconomic and technical predictors, principal component analysis (PCA), limits to arbitrage, cross-sectional predictability, business cycle
JEL Classification: G10
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