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Economic Cycles and Expected Stock Returns

  • Beber, Alessandro
  • Brandt, Michael
  • Luisi, Maurizio

We construct daily real-time indices capturing the public information on realized and anticipated economic activity. The one-month change in realized fundamentals predicts US stock returns across horizons with strongest results between a month and a quarter. The information in anticipated fundamentals that is orthogonal to the realized data predicts returns even more strongly particularly at longer horizons up to two quarters. Splitting the sample into times of high versus low uncertainty, as measured by the cross-sectional dispersion of economist forecasts, we show that the predictability is largely concentrated in high-uncertainty times. Finally, extending the analysis internationally, we find similar results that are curiously much stronger when US data are used as predictors than global composites or local data.

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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 9528.

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Date of creation: Jun 2013
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Handle: RePEc:cpr:ceprdp:9528
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  1. Tim Bollerslev & Hao Zhou, 2007. "Expected Stock Returns and Variance Risk Premia," CREATES Research Papers 2007-17, Department of Economics and Business Economics, Aarhus University.
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  12. Evans, Martin D, 2005. "Where Are We Now? Real-Time Estimates of the Macroeconomy," MPRA Paper 831, University Library of Munich, Germany.
  13. Domenico Giannone & Lucrezia Reichlin & David Small, 2008. "Nowcasting: the real time informational content of macroeconomic data releases," ULB Institutional Repository 2013/6409, ULB -- Universite Libre de Bruxelles.
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