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Real estate climate index and aggregate stock returns: Evidence from China

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  • Jiang, Yuexiang
  • Fu, Tao
  • Long, Huaigang
  • Zaremba, Adam
  • Zhou, Wenyu

Abstract

We show that China's real estate climate index (RECI) can be used to forecast the aggregate stock market return. It outperforms popular return predictors both in- and out-of-sample, especially at the monthly horizon. Additionally, RECI's predictive ability is stronger among stocks of small market capitalization and low momentum. For a typical mean-variance investor, RECI's predictive power may provide an additional utility gain of 3.41%. We discuss three potential sources of RECI's predictive ability and present the corresponding evidence, including the cash flow channel, the firm fundamental channel, and the investment substitution channel.

Suggested Citation

  • Jiang, Yuexiang & Fu, Tao & Long, Huaigang & Zaremba, Adam & Zhou, Wenyu, 2022. "Real estate climate index and aggregate stock returns: Evidence from China," Pacific-Basin Finance Journal, Elsevier, vol. 75(C).
    • Handle: RePEc:eee:pacfin:v:75:y:2022:i:c:s0927538x22001366
    DOI: 10.1016/j.pacfin.2022.101841
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    More about this item

    Keywords

    Real estate climate index; Return predictability; Asset allocation; Predictive regression; Equity risk premium; Cash flow channel; Firm fundamentals; Substitution effect;
    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

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