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Macroeconomics matter: Leading economic indicators and the cross-section of global stock returns

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  • Long, Huaigang
  • Zaremba, Adam
  • Zhou, Wenyu
  • Bouri, Elie

Abstract

Leading economic indicators assist in forecasting future business conditions. Can they also predict aggregate stock returns? To answer this question, we examine six decades of data from 39 countries. Short-term changes in the composite leading indicator (CLI) positively correlate with future stock returns in the cross-section. The quintile of markets with the highest CLI increase outperforms the quintile with the lowest CLI change by 1.43% per month. The predictive power of the CLI survives multiple robustness checks and cannot be absorbed by established risk factors. Our findings imply an exploitable investment strategy that can be pursued with exchange-traded funds.

Suggested Citation

  • Long, Huaigang & Zaremba, Adam & Zhou, Wenyu & Bouri, Elie, 2022. "Macroeconomics matter: Leading economic indicators and the cross-section of global stock returns," Journal of Financial Markets, Elsevier, vol. 61(C).
    • Handle: RePEc:eee:finmar:v:61:y:2022:i:c:s1386418122000295
    DOI: 10.1016/j.finmar.2022.100736
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    Keywords

    Leading economic indicators; The cross-section of stock returns; International stock markets; Return predictability; Country equity indices;
    All these keywords.

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
    • E37 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Forecasting and Simulation: Models and Applications

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