Fourth-quarter Economic Growth and Time-varying Expected Returns

Stig V. Møller, Jesper Rangvid

Research output: Contribution to conferencePaperResearchpeer-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.
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.

Conference

ConferenceThe 39th European Finance Association Annual Meeting (EFA 2012)
Number39
LocationCopenhagen Business School
CountryDenmark
CityFrederiksberg
Period15/08/201218/08/2012
Internet address

Keywords

    Cite this

    Møller, S. V., & Rangvid, J. (2012). Fourth-quarter Economic Growth and Time-varying Expected Returns. Paper presented at The 39th European Finance Association Annual Meeting (EFA 2012), Frederiksberg, Denmark.
    Møller, Stig V. ; Rangvid, Jesper. / Fourth-quarter Economic Growth and Time-varying Expected Returns. Paper presented at The 39th European Finance Association Annual Meeting (EFA 2012), Frederiksberg, Denmark.50 p.
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    keywords = "Fourth-quarter economic growth, Expected returns, Consumer confidence, Risk compensation, Mispricing",
    author = "M{\o}ller, {Stig V.} and Jesper Rangvid",
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    Møller, SV & Rangvid, J 2012, 'Fourth-quarter Economic Growth and Time-varying Expected Returns' Paper presented at, Frederiksberg, Denmark, 15/08/2012 - 18/08/2012, .

    Fourth-quarter Economic Growth and Time-varying Expected Returns. / Møller, Stig V.; Rangvid, Jesper.

    2012. Paper presented at The 39th European Finance Association Annual Meeting (EFA 2012), Frederiksberg, Denmark.

    Research output: Contribution to conferencePaperResearchpeer-review

    TY - CONF

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

    AU - Møller,Stig V.

    AU - Rangvid,Jesper

    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

    ER -

    Møller SV, Rangvid J. Fourth-quarter Economic Growth and Time-varying Expected Returns. 2012. Paper presented at The 39th European Finance Association Annual Meeting (EFA 2012), Frederiksberg, Denmark.