Economic Expectations and Stock Returns: Evidence from China Pakistan Economic Corridor

Abstract

The ongoing hype of China Pakistan Economic Corridor (CPEC) as a game-changer for the economy of Pakistan has induced a lot of expectations among all the countrymen. In this paper, we have tried to investigate whether the CPEC driven economic expectations reflect in stock market returns. We, use weekly search volume data from millions of internet users across the country to reveal CPEC driven economic attitude. By combining the volume of Internet queries such as, “CPEC”, “CPEC Jobs”, “Tax”, “CPEC route”, “Transport” and so forth, we create an economic attitude (Expectations) revealed by search volume index, as a measure of investor sentiments. We find that Expectations predict stock returns in the short-run, and this effect is consistent across all the main business sectors. Moreover, we also find that the conditional variation in stock returns positively correlates with the conditional variation in Expectations. These results have important implications for active investors and fund managers.

Keywords: China Pakistan Economic Corridor (CPEC), Economic Expectations, Search Volume Index (SVI), Investor Sentiment, Stock Market Returns

JEL Classification: G10, G40