Is the investment factor a proxy for time-varying investment opportunities? The US and international evidence

Motivated from Fama’s (1991) conjecture of an explicit link between the cross-sectional and time-series stock return predictability, we investigate whether the investment factor constructed from the cross-section of stocks also has time-series predictive power for stock returns within Merton’s (1973...

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Bibliographic Details
Published in:Journal of banking & finance 2014-07, Vol.44, p.219-232
Main Authors: Huang, Lin, Wang, Zijun
Format: Article
Language:English
Subjects:
Cross-sectional analysis
Forecasts
GARCH
ICAPM
International
Investment
Investment factor
Investment opportunities
Investments
MIDAS
Predictions
Rates of return
Risk management
Statistical analysis
Stock returns
Studies
Time series
U.S.A
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Summary:Motivated from Fama’s (1991) conjecture of an explicit link between the cross-sectional and time-series stock return predictability, we investigate whether the investment factor constructed from the cross-section of stocks also has time-series predictive power for stock returns within Merton’s (1973) ICAPM framework. The evidence from both US and other G-7 countries (except Japan) suggests that the investment factor is a proxy for time-varying investment opportunities. We also find that the risk-return relation is positive and statistically significant after controlling for the covariance between the market factor and the investment factor.
ISSN:0378-4266
1872-6372
DOI:10.1016/j.jbankfin.2014.04.016