End-of-the-Year Economic Growth and Time-varying Expected Returns

Stig Vinther Møller, Jesper Rangvid

Research output: Working paperResearch

Abstract

We show that macroeconomic growth at the end of the year (fourth-quarter or December) strongly predicts the returns of the aggregate market, small- and large-cap stocks, portfolios sorted on book-to-market and dividend yields, bond returns, and international stock returns, whereas economic growth during the rest of the year does not predict returns. End-of-the-year economic growth rates contain considerably more information about expected returns than standard variables used to predict returns, are robust to the choice of macro variables, and work in-sample, out-of-sample, and in subsamples. To explain these results, we show as the second main fi?nding of our paper that economic growth and growth in economic confidence (consumer con?dence and business con?dence) are strongly correlated during the fourth quarter, but not during the other quarters. In summary, we therefore show that when economic growth is low at the end of the year, confi?dence in the economy is also low such that investors require higher future returns. During the rest of the year, there are no such relations between growth, confi?dence, and returns.
We show that macroeconomic growth at the end of the year (fourth-quarter or December) strongly predicts the returns of the aggregate market, small- and large-cap stocks, portfolios sorted on book-to-market and dividend yields, bond returns, and international stock returns, whereas economic growth during the rest of the year does not predict returns. End-of-the-year economic growth rates contain considerably more information about expected returns than standard variables used to predict returns, are robust to the choice of macro variables, and work in-sample, out-of-sample, and in subsamples. To explain these results, we show as the second main fi?nding of our paper that economic growth and growth in economic confidence (consumer con?dence and business con?dence) are strongly correlated during the fourth quarter, but not during the other quarters. In summary, we therefore show that when economic growth is low at the end of the year, confi?dence in the economy is also low such that investors require higher future returns. During the rest of the year, there are no such relations between growth, confi?dence, and returns.
LanguageEnglish
Place of PublicationAarhus
PublisherAarhus Universitetsforlag
Number of pages48
StatePublished - 2012
SeriesCreates Research Paper
Number42

Keywords

  • End-of-the.year (Fourth-quater) Economic Growth
  • Expected Returns
  • Consumer Confidence
  • Purchasing Managers Index
  • Risk Compensation

Cite this

Møller, S. V., & Rangvid, J. (2012). End-of-the-Year Economic Growth and Time-varying Expected Returns. Aarhus: Aarhus Universitetsforlag. Creates Research Paper, No. 42
Møller, Stig Vinther ; Rangvid, Jesper. / End-of-the-Year Economic Growth and Time-varying Expected Returns. Aarhus : Aarhus Universitetsforlag, 2012. (Creates Research Paper; No. 42).
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Møller, SV & Rangvid, J 2012 'End-of-the-Year Economic Growth and Time-varying Expected Returns' Aarhus Universitetsforlag, Aarhus.

End-of-the-Year Economic Growth and Time-varying Expected Returns. / Møller, Stig Vinther; Rangvid, Jesper.

Aarhus : Aarhus Universitetsforlag, 2012.

Research output: Working paperResearch

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T1 - End-of-the-Year Economic Growth and Time-varying Expected Returns

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PY - 2012

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N2 - We show that macroeconomic growth at the end of the year (fourth-quarter or December) strongly predicts the returns of the aggregate market, small- and large-cap stocks, portfolios sorted on book-to-market and dividend yields, bond returns, and international stock returns, whereas economic growth during the rest of the year does not predict returns. End-of-the-year economic growth rates contain considerably more information about expected returns than standard variables used to predict returns, are robust to the choice of macro variables, and work in-sample, out-of-sample, and in subsamples. To explain these results, we show as the second main fi?nding of our paper that economic growth and growth in economic confidence (consumer con?dence and business con?dence) are strongly correlated during the fourth quarter, but not during the other quarters. In summary, we therefore show that when economic growth is low at the end of the year, confi?dence in the economy is also low such that investors require higher future returns. During the rest of the year, there are no such relations between growth, confi?dence, and returns.

AB - We show that macroeconomic growth at the end of the year (fourth-quarter or December) strongly predicts the returns of the aggregate market, small- and large-cap stocks, portfolios sorted on book-to-market and dividend yields, bond returns, and international stock returns, whereas economic growth during the rest of the year does not predict returns. End-of-the-year economic growth rates contain considerably more information about expected returns than standard variables used to predict returns, are robust to the choice of macro variables, and work in-sample, out-of-sample, and in subsamples. To explain these results, we show as the second main fi?nding of our paper that economic growth and growth in economic confidence (consumer con?dence and business con?dence) are strongly correlated during the fourth quarter, but not during the other quarters. In summary, we therefore show that when economic growth is low at the end of the year, confi?dence in the economy is also low such that investors require higher future returns. During the rest of the year, there are no such relations between growth, confi?dence, and returns.

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Møller SV, Rangvid J. End-of-the-Year Economic Growth and Time-varying Expected Returns. Aarhus: Aarhus Universitetsforlag. 2012.