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Real aggregate activity and stock returns

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  • Du, Ding
  • Denning, Karen
  • Zhao, Xiaobing

Abstract

The notion that real aggregate activity exerts important influence on stock returns has strong theoretical appeal but weak empirical support. We argue in this paper that the lack of empirical reaction to macro news might be at least partly due to the usual focus on macro variables, which are noisy measures of real aggregate activity or the common factor. To test our conjecture, we focus on the Chicago Fed National Activity Index (CFNAI-MA3), a single summary measure of the common factor in 85 macro variables. Our main finding is that the news component of this index does affect stock returns. The effects show up at the market level as well as at the portfolio level. The effects are not only statistically but also economically significant.

Suggested Citation

  • Du, Ding & Denning, Karen & Zhao, Xiaobing, 2012. "Real aggregate activity and stock returns," Journal of Economics and Business, Elsevier, vol. 64(5), pages 323-337.
    • Handle: RePEc:eee:jebusi:v:64:y:2012:i:5:p:323-337
    DOI: 10.1016/j.jeconbus.2012.06.002
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    More about this item

    Keywords

    Real aggregate activity; Chicago Fed National Activity Index; Stock returns;
    All these keywords.

    JEL classification:

    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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