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Forecasting US stock market returns by the aggressive stock-selection opportunity

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  • Li, Yan
  • Liang, Chao
  • Huynh, Toan Luu Duc

Abstract

We propose a measurement of aggressive stock-selection opportunity based on positive alphas and idiosyncratic volatilities of cross-section stocks, and examine the role of aggressive stock-selection opportunity in predicting stock market returns. For the US stock market, we find that the change of aggressive stock-selection opportunity has a significant and negative coefficient for predicting future one-month market returns. The out-of-sample results also show the change of aggressive stock-selection opportunity improves the return forecasting performance and increases investors’ economic values. In particular, the predictive information of the change of aggressive stock-selection opportunity is independent of traditional macroeconomic predictors. The economic channel evidence shows that the change of aggressive stock-selection opportunity increases future market volatility and then results in lower market returns.

Suggested Citation

  • Li, Yan & Liang, Chao & Huynh, Toan Luu Duc, 2022. "Forecasting US stock market returns by the aggressive stock-selection opportunity," Finance Research Letters, Elsevier, vol. 50(C).
    • Handle: RePEc:eee:finlet:v:50:y:2022:i:c:s1544612322005025
    DOI: 10.1016/j.frl.2022.103323
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    More about this item

    Keywords

    Stock-selection opportunity; Aggressive stock-selection opportunity; Stock market returns; Forecasting returns;
    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
    • G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors

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