Fourth-quarter Economic Growth and Time-varying Expected Returns

Stig V. Møller; Jesper Rangvid

Fourth-quarter Economic Growth and Time-varying Expected Returns

Stig V. Møller, Jesper Rangvid

Department of Finance

Aarhus University

Research output: Contribution to conference › Paper › Research › peer-review

Abstract

We show that fourth-quarter macroeconomic growth rates strongly predict 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 growth rates during the other quarters do not predict returns. Fourth-quarter economic growth rates contain considerably more information about expected returns than standard variables used in the literature, are
robust to the choice of macro variable, and work in-sample, out-of-sample, and in subsamples. To help explain these results, we show that economic growth and growth in consumer confidence are correlated during the fourth quarter, but not during the other quarters: When economic growth is low during the fourth quarter, confidence in the economy is also low such that investors require higher future returns. We discuss rational and behavioral reasons why fourth-quarter economic growth, growth in consumer confidence, and expected returns are related.

Original language	English
Publication date	2012
Number of pages	50
Publication status	Published - 2012
Event	The 39th European Finance Association Annual Meeting (EFA 2012) - Copenhagen Business School, Frederiksberg, Denmark Duration: 15 Aug 2012 → 18 Aug 2012 Conference number: 39 http://www.efa2012.org/

Conference

Conference	The 39th European Finance Association Annual Meeting (EFA 2012)
Number	39
Location	Copenhagen Business School
Country/Territory	Denmark
City	Frederiksberg
Period	15/08/2012 → 18/08/2012
Internet address	http://www.efa2012.org/

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This output contributes to the following UN Sustainable Development Goals (SDGs)

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http://www.efa2012.org/papers/t3g2.pdf

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Cite this

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title = "Fourth-quarter Economic Growth and Time-varying Expected Returns",

abstract = "We show that fourth-quarter macroeconomic growth rates strongly predict 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 growth rates during the other quarters do not predict returns. Fourth-quarter economic growth rates contain considerably more information about expected returns than standard variables used in the literature, arerobust to the choice of macro variable, and work in-sample, out-of-sample, and in subsamples. To help explain these results, we show that economic growth and growth in consumer confidence are correlated during the fourth quarter, but not during the other quarters: When economic growth is low during the fourth quarter, confidence in the economy is also low such that investors require higher future returns. We discuss rational and behavioral reasons why fourth-quarter economic growth, growth in consumer confidence, and expected returns are related. ",

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author = "M{\o}ller, {Stig V.} and Jesper Rangvid",

year = "2012",

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note = "The 39th European Finance Association Annual Meeting (EFA 2012) ; Conference date: 15-08-2012 Through 18-08-2012",

url = "http://www.efa2012.org/",

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TY - CONF

T1 - Fourth-quarter Economic Growth and Time-varying Expected Returns

AU - Møller, Stig V.

AU - Rangvid, Jesper

N1 - Conference code: 39

PY - 2012

Y1 - 2012

N2 - We show that fourth-quarter macroeconomic growth rates strongly predict 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 growth rates during the other quarters do not predict returns. Fourth-quarter economic growth rates contain considerably more information about expected returns than standard variables used in the literature, arerobust to the choice of macro variable, and work in-sample, out-of-sample, and in subsamples. To help explain these results, we show that economic growth and growth in consumer confidence are correlated during the fourth quarter, but not during the other quarters: When economic growth is low during the fourth quarter, confidence in the economy is also low such that investors require higher future returns. We discuss rational and behavioral reasons why fourth-quarter economic growth, growth in consumer confidence, and expected returns are related.

AB - We show that fourth-quarter macroeconomic growth rates strongly predict 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 growth rates during the other quarters do not predict returns. Fourth-quarter economic growth rates contain considerably more information about expected returns than standard variables used in the literature, arerobust to the choice of macro variable, and work in-sample, out-of-sample, and in subsamples. To help explain these results, we show that economic growth and growth in consumer confidence are correlated during the fourth quarter, but not during the other quarters: When economic growth is low during the fourth quarter, confidence in the economy is also low such that investors require higher future returns. We discuss rational and behavioral reasons why fourth-quarter economic growth, growth in consumer confidence, and expected returns are related.

KW - Fourth-quarter economic growth

KW - Expected returns

KW - Consumer confidence

KW - Risk compensation

KW - Mispricing

M3 - Paper

T2 - The 39th European Finance Association Annual Meeting (EFA 2012)

Y2 - 15 August 2012 through 18 August 2012

ER -