Business Condition Expectations and Stock Return Predictability: International Evidence

45 Pages Posted: 28 Apr 2023 Last revised: 21 Sep 2023

See all articles by Fuwei Jiang

Fuwei Jiang

Xiamen University

Fujing Jin

Beijing Jiaotong University, School of Economics and Management

Hongkui Liu

Chinese Academy of Social Sciences (CASS) - Institute of Economics

Jiasheng Yu

Central University of Finance and Economics (CUFE) - School of Finance

Date Written: April 27, 2023

Abstract

We construct a one-month-ahead conditional expectation measure of global business conditions relying on lagged OECD composite leading indices, and demonstrate that this index is a powerful predictor for aggregate stock returns around the globe, both in- and out-of-sample. We indicate that leading economic variables are valuable in capturing one-month-ahead conditional expectations when their lead time over actual economic activity is known. Moreover, the predictive power of the index at one-month return horizon stems from capturing business condition expectations for the future one-month. The predictability weakens as the forecast horizon for business condition expectations deviates further from the future one-month. Furthermore, we show that the index affects stock returns through the cash flow channel, and provides incremental forecasting information beyond local idiosyncratic business conditions and other economic and financial forces.

Keywords: Global business condition expectation, International stock markets, Return predictability, Out-of-sample forecast

JEL Classification: G12, G15

Suggested Citation

Jiang, Fuwei and Jin, Fujing and Liu, Hongkui and Yu, Jiasheng, Business Condition Expectations and Stock Return Predictability: International Evidence (April 27, 2023). Available at SSRN: https://ssrn.com/abstract=4430834 or http://dx.doi.org/10.2139/ssrn.4430834

Fuwei Jiang

Xiamen University ( email )

Xiamen, Fujian 361005
China

Fujing Jin

Beijing Jiaotong University, School of Economics and Management ( email )

China

Hongkui Liu

Chinese Academy of Social Sciences (CASS) - Institute of Economics

Jiasheng Yu (Contact Author)

Central University of Finance and Economics (CUFE) - School of Finance ( email )

Shahe Higher Education Park, Changping District
Beijing, 102206
China

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