Working Paper: CEPR ID: DP9528
Authors: Alessandro Beber; Michael Brandt; Maurizio Luisi
Abstract: 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.
Keywords: macroeconomic uncertainty; state of the economy; stock market predictability
JEL Codes: G12
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| one-month change in realized economic growth (O49) | future stock returns (G17) |
| macroeconomic uncertainty (D89) | predictive power of realized growth on stock returns (G17) |
| anticipated growth (O49) | future stock returns (G17) |
| realized growth (O49) | future stock returns (G17) |
| macroeconomic indicators (E66) | stock market returns (G17) |