DP9528 Economic Cycles and Expected Stock Returns

Author(s): Alessandro Beber, Michael Brandt, Maurizio Luisi
Publication Date: June 2013
Keyword(s): macroeconomic uncertainty, state of the economy, stock market predictability
JEL(s): G12
Programme Areas: Financial Economics
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=9528

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.