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Aggregate expected investment growth and stock market returns

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  • Li, Jun
  • Wang, Huijun
  • Yu, Jianfeng

Abstract

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.

Suggested Citation

  • Li, Jun & Wang, Huijun & Yu, Jianfeng, 2021. "Aggregate expected investment growth and stock market returns," Journal of Monetary Economics, Elsevier, vol. 117(C), pages 618-638.
    • Handle: RePEc:eee:moneco:v:117:y:2021:i:c:p:618-638
    DOI: 10.1016/j.jmoneco.2020.03.016
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    Keywords

    Investment plan; Investment lags; Time-varying risk premium; Investor sentiment; Stock market prediction;
    All these keywords.

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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