Aggregate expected investment growth and stock market returns
AuthorLi, J; Wang, H; Yu, J
Source TitleJournal of Monetary Economics
University of Melbourne Author/sWang, Huijun
Document TypeJournal Article
CitationsLi, J., Wang, H. & Yu, J. (2021). Aggregate expected investment growth and stock market returns. Journal of Monetary Economics, 117, pp.618-638. https://doi.org/10.1016/j.jmoneco.2020.03.016.
Access StatusAccess this item via the Open Access location
Open Access URLPublished version
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 R2 is 18.2% and the out-of-sample R2 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.
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