Hostname: page-component-78c5997874-xbtfd Total loading time: 0 Render date: 2024-11-15T18:26:40.492Z Has data issue: false hasContentIssue false
  • English
  • Français

Idiosyncrasy as a Leading Indicator

Published online by Cambridge University Press:  28 November 2022

Randall Morck ,
Bernard Yeung  and
Lu Y. Zhang Open the ORCID record for Lu Y. Zhang [Opens in a new window]
Randall Morck
Affiliation:
University of Alberta School of Business, NBER, and Asian Bureau of Finance and Economics Research rmorck@ualberta.ca
Bernard Yeung
Affiliation:
National University of Singapore Business School byeung@nus.edu.sg
Lu Y. Zhang*
Affiliation:
Toronto Metropolitan University Ted Rogers School of Management
*
lu.zhang@torontomu.ca (corresponding author)
Rights & Permissions [Opens in a new window]

Abstract

Core share and HTML view are not available for this content. However, as you have access to this content, a full PDF is available via the ‘Save PDF’ action button.

Disequilibrating macro shocks affect different firms’ prospects differently, increasing idiosyncratic variation in forward-looking stock returns before affecting economic growth. Consistent with most such shocks from 1947 to 2020 enhancing productivity, increased idiosyncratic stock return variation forecasts next-quarter real GDP growth, industrial production growth, and consumption growth both in-sample and out-of-sample. These effects persist after controlling for other leading economic indicators.

Type
Research Article
Information
Journal of Financial and Quantitative Analysis , Volume 58 , Issue 8 , December 2023 , pp. 3547 - 3576
Creative Commons
Creative Common License - CCCreative Common License - BYCreative Common License - NCCreative Common License - SA
This is an Open Access article, distributed under the terms of the Creative Commons Attribution-NonCommercial-ShareAlike licence (https://creativecommons.org/licenses/by-nc-sa/4.0), which permits non-commercial re-use, distribution, and reproduction in any medium, provided the same Creative Commons licence is used to distribute the re-used or adapted article and the original article is properly cited. The written permission of Cambridge University Press must be obtained prior to any commercial use.
Copyright
© The Author(s), 2022. Published by Cambridge University Press on behalf of the Michael G. Foster School of Business, University of Washington

Footnotes

We thank Jennifer Conrad (the editor), Gill Segal (the referee), and David Vines for their helpful comments and suggestions.

References

Agarwal, S., and Qian, W.. “Consumption and Debt Response to Unanticipated Income Shocks: Evidence from a Natural Experiment in Singapore.” American Economic Review, 104 (2014), 4205–4230.CrossRefGoogle Scholar
Ang, A.; Hodrick, R. J.; Xing, Y.; and Zhang, X.. “The Cross‐Section of Volatility and Expected Returns.” Journal of Finance, 61 (2006), 259–299.CrossRefGoogle Scholar
Aghion, P., and Howitt, P.. “A Model of Growth Through Creative Destruction.” Econometrica, 60 (1992), 323–351.CrossRefGoogle Scholar
Alessandri, P., and Mumtaz, H.. “Financial Regimes and Uncertainty Shocks.” Journal of Monetary Economics, 101 (2019), 31–46.CrossRefGoogle Scholar
Alfaro, I.; Bloom, N., and Lin, X.. “The Finance Uncertainty Multiplier.” NBER Working Paper No. 24571 (2018).CrossRefGoogle Scholar
Amihud, Y. “Illiquidity and Stock Returns: Cross-Section and Time-Series Effects.” Journal of Financial Markets, 5 (2002), 31–56.CrossRefGoogle Scholar
Aw, B. Y.; Roberts, M., and Xu, D. Y.. “R&D Investment, Exporting, and Productivity Dynamics.” American Economic Review, 101 (2011), 1312–1344.CrossRefGoogle Scholar
Bachmann, R., and Bayer, C.. “Investment Dispersion and the Business Cycle.” American Economic Review, 104 (2014), 1392–1416.CrossRefGoogle Scholar
Bansal, R.; Croce, M. M.; Liao, W.; and Rosen, S.. “Uncertainty-Induced Reallocations and Growth.” NBER Working Paper No. 26248 (2019).CrossRefGoogle Scholar
Barro, R. J. “The Stock Market and Investment.” Review of Financial Studies, 3 (1990), 115–131.CrossRefGoogle Scholar
Barro, R. J. “Inflation and Economic Growth.” NBER Working Paper No. 5326 (1995).CrossRefGoogle Scholar
Bekaert, G., and Engstrom, E.. “Asset Return Dynamics Under Habits and Bad Environment–Good Environment Fundamentals.” Journal of Political Economy, 125 (2017), 713–760.CrossRefGoogle Scholar
Berge, T. J., and Jordà, Ò.. “Evaluating the Classification of Economic Activity into Recessions and Expansions.” American Economic Journal: Macroeconomics, 3 (2011), 246–277.Google Scholar
Bernanke, B. S. “Irreversibility, Uncertainty, and Cyclical Investment.” Quarterly Journal of Economics, 98 (1983), 85–106.CrossRefGoogle Scholar
Black, F. “The ABCs of Business Cycles.” Financial Analysts Journal, 37 (1981), 75–80.CrossRefGoogle Scholar
Bloom, N. “The Impact of Uncertainty Shocks.” Econometrica, 77 (2009), 623–685.Google Scholar
Bordalo, P.; Gennaioli, N.; and Shleifer, A.. “Diagnostic Expectations and Credit Cycles.” Journal of Finance, 73 (2018), 199–227.CrossRefGoogle Scholar
Brennan, M. J., and Schwartz, E. S.. “Evaluating Natural Resource Investments.” Journal of Business, 58 (1985), 135–157.CrossRefGoogle Scholar
Campbell, J.; Lettau, M.; Malkiel, B.; and Xu, Y.. “Have Individual Stocks Become More Volatile? An Empirical Exploration of Idiosyncratic Risk.” Journal of Finance, 56 (2001), 1–43.CrossRefGoogle Scholar
Carhart, M. M. “On Persistence in Mutual Fund Performance.” Journal of Finance, 52 (1997), 57–82.CrossRefGoogle Scholar
Chang, H.; d’Avernas, A.; and Eisfeldt, A. L.. “Bonds vs. Equities: Information for Investment. Equities: Information for Investment.” Working Paper, available at https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3841206 (2021).CrossRefGoogle Scholar
Chen, N. F. “Financial Investment Opportunities and the Macroeconomy.” Journal of Finance, 46 (1991), 529–554.CrossRefGoogle Scholar
Chen, S, and Feldman, E. R.. “Activist‐Impelled Divestitures and Shareholder Value.” Strategic Management Journal, 39 (2018), 2726–2744.CrossRefGoogle Scholar
Choudhry, T.; Papadimitriou, F. I.; and Shabi, S.. “Stock Market Volatility and Business Cycle: Evidence from Linear and Nonlinear Causality Tests.” Journal of Banking & Finance, 66 (2016), 89–101.CrossRefGoogle Scholar
Clark, T., and McCracken, M.. “Tests of Equal Forecast Accuracy and Encompassing for Nested Models.” Journal of Econometrics, 105 (2001), 85–110.CrossRefGoogle Scholar
Cochrane, J. H. “Production‐Based Asset Pricing and the Link Between Stock Returns and Economic Fluctuations.” Journal of Finance, 46 (1991), 209–237.Google Scholar
Daley, L.; Mehrotra, V.; and Sivakumar, R.. “Corporate Focus and Value Creation Evidence from Spinoffs.” Journal of Financial Economics, 45 (1997), 257–281.CrossRefGoogle Scholar
Décaire, P. H., and Wittry, M. D.. “Strategic Learning and Corporate Investment.” Working Paper, Fisher College of Business (2022).Google Scholar
Di Tella, S., and Hall, R.. “Risk Premium Shocks Can Create Inefficient Recessions.” Review of Economic Studies, 89 (2022), 1335–1369.CrossRefGoogle Scholar
Diebold, F. X.; Rudebusch, G. D.; and Aruoba, S. B.. The “Macroeconomy and the Yield Curve: a Dynamic Latent Factor Approach.” Journal of Econometrics, 131 (2006), 309–338.CrossRefGoogle Scholar
Estrella, A., and Hardouvelis, G. A.. “The Term Structure as a Predictor of Real Economic Activity.” Journal of Finance, 46 (1991), 555–576.CrossRefGoogle Scholar
Estrella, A., and Mishkin, F. S.. “Predicting U.S. Recessions: Financial Variables as Leading Indicators.” Review of Economics and Statistics, 80 (1998), 45–61.CrossRefGoogle Scholar
Evans, C. L.; Liu, C. T.; and Pham-Kanter, G.. “The 2001 Recession and the Chicago Fed National Activity Index: Identifying Business Cycle Turning Points.” Economic Perspectives-Federal Reserve Bank of Chicago, 26 (2002), 26–43.Google Scholar
Faccio, M., and McConnell, J. J.. “Impediments to the Schumpeterian Process in the Replacement of Large Firms.” NBER Working Paper No. 27871 (2020).CrossRefGoogle Scholar
Fair, R. C., and Shiller, R. J.. “Comparing Information in Forecasts from Econometric Models.” American Economic Review, 80 (1990), 375–389.Google Scholar
Fama, E. F. “Stock Returns, Real Activity, Inflation, and Money.” American Economic Review, 71 (1981), 545–565.Google Scholar
Fama, E. F., and French, K. R.. “Business Conditions and Expected Returns on Stocks and Bonds.” Journal of Financial Economics, 25 (1989), 23–49.CrossRefGoogle Scholar
Fama, E. F., and French, K. R.. “Dividend Yields and Expected Stock Returns.” Journal of Financial Economics, 22 (1988), 3–25.CrossRefGoogle Scholar
Fischer, S. “The Role of Macroeconomic Factors in Growth.” Journal of Monetary Economics, 32 (1993), 485–512.CrossRefGoogle Scholar
Fogel, K.; Morck, R.; and Yeung, B.. “Big Business Stability and Economic Growth: Is What’s Good for General Motors Good for America?” Journal of Financial Economics, 89 (2008), 83–108.CrossRefGoogle Scholar
Ganong, P., and Noel, P.. “Consumer Spending During Unemployment: Positive and Normative Implications.” American Economic Review, 109 (2019), 2383–2424.CrossRefGoogle Scholar
Garcia, R.; Mantilla-Garcia, D.; and Martellini, L.. “A Model-Free Measure of Aggregate Idiosyncratic Volatility and the Prediction of Market Returns.” Journal of Financial and Quantitaitive Analysis, 49 (2014), 1133–1165.CrossRefGoogle Scholar
Gilchrist, S., and Zakrajšek, E.. “Credit Spreads and Business Cycle Fluctuations.” American Economic Review, 102 (2012), 1692–1720.CrossRefGoogle Scholar
Guthrie, G. Real Options in Theory and Practice. New York, NY: Oxford University Press (2009).CrossRefGoogle Scholar
Hamilton, J. D., and Lin, G.. “Stock Market Volatility and the Business Cycle.” Journal of Applied Econometrics, 11 (1996), 573–593.3.0.CO;2-T>CrossRefGoogle Scholar
Harvey, C. R. “The Real Term Structure and Consumption Growth.” Journal of Financial Economics, 22 (1988), 305–333.CrossRefGoogle Scholar
Hawk, A.; Pacheco-de-Almeida, G.; and Yeung, B.. “Fast Mover Advantage: Speed Capabilities and Entry into the Emerging Submarket of Atlantic Basin LNG.” Strategic Management Journal, 34 (2013), 1531–1550.CrossRefGoogle Scholar
Henry, P. B. “Capital Account Liberalization: Theory, Evidence, and Speculation.” Journal of Economic Literature, 45 (2007), 887–935.CrossRefGoogle Scholar
Herskovic, B.; Kelly, B.; Lustig, H.; and Van Nieuwerburgh, S.. “The Common Factor in Idiosyncratic Volatility: Quantitative Asset Pricing Implications.” Journal of Financial Economics, 119 (2016), 249–283.CrossRefGoogle Scholar
İmrohoroğlu, A., and Tüzel, S.. “Firm-Level Productivity, Risk, and Return.” Management Science, 60 (2014), 2073–2090.CrossRefGoogle Scholar
Kogan, L.; Papanikolaou, D.; Seru, A.; and Stoffman, N.. “Technological Innovation, Resource Allocation, and Growth.” Quarterly Journal of Economics, 132 (2017), 665–712.CrossRefGoogle Scholar
Kydland, F. E., and Prescott, E. C.. “Time to Build and Aggregate Fluctuations.” Econometrica, 50 (1982), 1345–1370.CrossRefGoogle Scholar
La Porta, R.; Lopez-de-Silanes, F.; and Shleifer, A.. “The Economic Consequences of Legal Origins.” Journal of Economic Literature, 46 (2008), 285–332.CrossRefGoogle Scholar
Leippold, M., and Stromberg, J.. “Strategic Technology Adoption and Hedging Under Incomplete Markets.” Journal of Banking & Finance, 81 (2017), 181–199.CrossRefGoogle Scholar
Liu, C., and Wang, S.. “Investment, Idiosyncratic Risk, and Growth Options.” Journal of Empirical Finance, 61 (2021), 118–138.CrossRefGoogle Scholar
Liu, L. X.; Whited, T.; and Zhang, L..“Investment-Based Expected Stock Returns.” Journal of Political Economy, 117 (2009), 1105–1139.CrossRefGoogle Scholar
López-Salido, D.; Stein, J. C.; and Zakrajšek, E.. “Credit-Market Sentiment and the Business Cycle.” Quarterly Journal of Economics, 132 (2017), 1373–1426.CrossRefGoogle Scholar
McCracken, M. W. “Asymptotics for Out of Sample Tests of Granger Causality.” Journal of Econometrics, 140 (2007), 719–752.CrossRefGoogle Scholar
Miao, J., and Wang, N.. “Investment, Consumption, and Hedging Under Incomplete Markets.” Journal of Financial Economics, 86 (2007), 608–642.CrossRefGoogle Scholar
Morck, R.; Yeung, B.; and Yu, W.. “The Information Content of Stock Markets: Why Do Emerging Markets Have Synchronous Stock Price Movements?” Journal of Financial Economics, 58 (2000), 215–260.CrossRefGoogle Scholar
Myers, S. C., and Lambrecht, B.. “A Theory of Takeovers and Disinvestment.” NBER Working Paper No. 11082 (2022).Google Scholar
Næs, R.; Skjeltorp, J. A.; and Ødegaard, B. A.. “Stock Market Liquidity and the Business Cycle.” Journal of Finance, 66 (2011), 139–176.CrossRefGoogle Scholar
Newey, W., and West, K.. “Hypothesis Testing with Efficient Method of Moments Estimation.” International Economic Review, 55 (1987), 777–787.CrossRefGoogle Scholar
Roll, R. “ R 2 .” Journal of Finance, 43 (1988), 541–566.Google Scholar
Romer, P. M. “Endogenous Technological Change.” Journal of Political Economy, 98 (1990), 71–102.CrossRefGoogle Scholar
Schumpeter, J. A. The Theory of Economic Development. Cambridge, MA: Harvard University Press (1911).Google Scholar
Schwert, G. W. “Why Does Stock Market Volatility Change over Time?” Journal of Finance, 44 (1989), 1115–1153.CrossRefGoogle Scholar
Segal, G. “A Tale of Two Volatilities: Sectoral Uncertainty, Growth, and Asset Prices.” Journal of Financial Economics, 134 (2019), 110–140.CrossRefGoogle Scholar
Segal, G.; Shaliastovich, I.; and Yaron, A.. “Good and Bad Uncertainty: Macroeconomic and Financial Market Implications.” Journal of Financial Economics, 117 (2015), 369–397.CrossRefGoogle Scholar
Solow, R. M. “Technical Change and the Aggregate Production Function.” Review of Economics and Statistics, 39 (1957), 312–320.CrossRefGoogle Scholar
Stein, L. C., and Stone, E.. “The Effect of Uncertainty on Investment, Hiring, and R&D: Causal Evidence from Equity Options.” Working Paper, available at https://papers.ssrn.com/sol3/papers.cfm?abstract_id=1649108 (2013).Google Scholar
Stivers, C. T. “Firm-Level Return Dispersion and the Future Volatility of Aggregate Stock Market Returns.” Journal of Financial Markets, 6 (2003), 389–411.CrossRefGoogle Scholar
Stock, J., and Watson, M.. “New Indexes of Coincident and Leading Indicators.” NBER Macroeconomics Annual, 4 (1989), 351–394.CrossRefGoogle Scholar
Switzer, L. N., and Picard, A.. “Stock Market Liquidity and Economic Cycles: A Non-Linear Approach.” Economic Modelling, 57 (2016), 106–119.CrossRefGoogle Scholar
Syverson, C. “What Determines Productivity?” Journal of Economic Literature, 49 (2011), 326–365.CrossRefGoogle Scholar
Vivarelli, M. “Innovation, Employment and Skills in Advanced and Developing Countries: A Survey of Economic Literature.” Journal of Economic Issues, 48 (2014), 123–154.CrossRefGoogle Scholar
Supplementary material: PDF

Morck et al. supplementary material

Morck et al. supplementary material

Download Morck et al. supplementary material(PDF)
PDF 233.3 KB