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Is the investment factor a proxy for time-varying investment opportunities? The US and international evidence

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  • Huang, Lin
  • Wang, Zijun

Abstract

Motivated from Fama’s (1991) conjecture of an explicit link between the cross-sectional and time-series stock return predictability, we investigate whether the investment factor constructed from the cross-section of stocks also has time-series predictive power for stock returns within Merton’s (1973) ICAPM framework. The evidence from both US and other G-7 countries (except Japan) suggests that the investment factor is a proxy for time-varying investment opportunities. We also find that the risk-return relation is positive and statistically significant after controlling for the covariance between the market factor and the investment factor.

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  • Huang, Lin & Wang, Zijun, 2014. "Is the investment factor a proxy for time-varying investment opportunities? The US and international evidence," Journal of Banking & Finance, Elsevier, vol. 44(C), pages 219-232.
  • Handle: RePEc:eee:jbfina:v:44:y:2014:i:c:p:219-232
    DOI: 10.1016/j.jbankfin.2014.04.016
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    Keywords

    Investment factor; ICAPM; Investment opportunities; GARCH; MIDAS;

    JEL classification:

    • G1 - Financial Economics - - General Financial Markets

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