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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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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cited_by cdi_FETCH-LOGICAL-c460t-3094f9e438e1290e295ecdb1e8d243c97c016090b682603a4a3a4423f6ddd4443
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description 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.
doi_str_mv 10.1016/j.jbankfin.2014.04.016
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source International Bibliography of the Social Sciences (IBSS); ScienceDirect Freedom Collection
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
title Is the investment factor a proxy for time-varying investment opportunities? The US and international evidence
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