News related to future GDP growth as a risk factor in equity returns

New Evidence on the Information and Predictive Content of the Baltic Dry Index

“…Moreover, the adjusted R 2 is relatively high, compared to those reported by other studies of predictors for stock returns (Campbell and Thompson [34]; Goyal and Welch [35]). In terms of industrial production, our empirical findings are consistent with those presented in the literature regarding the nexus between the real economy and the financial sector (Fama [5]; Cochrane [6]; Vassalou [10]; Rangvid [36]). Finally, the results are also consistent with the literature regarding the tendency of commodity prices to vary over the business cycle (Bessembinder and Chan [37] and Gorton et al [38]).…”

“…Rockinger [7]; Boldrin et al [8]; Estrella et al [9]; Vassalou [10]; Duarte et al [11]; Hong et al [12]; Clements and Galvao [13]; Cooper and Priestley [14]; Marcellino and Schumacher [15], amongst others). Theoretically, changes in industrial production lead to changes in activity, employment and liquidity in the economy.…”

Temperature shocks and the cost of equity capital: Implications for climate change perceptions

“…Vassalou, 2003;Kapadia, 2011). Specifically, we first use the tracking portfolio approach of Lamont (2001) to construct the temperature shock factor, as the news in the temperature realization leading to changing expectations regarding future temperature change; then we employ the standard time-series and cross-sectional regression methodology to estimate the loadings and risk premium associated with this factor; finally we calculate the economy-wide impact of temperature shocks on the cost of equity capital by multiplying the temperature shock risk premium by the weighted average loading on this factor.…”

Improvement in finite sample properties of the Hansen–Jagannathan distance test

“…This type of comparison has been adopted in many recent papers. For instance, by using the HJ-distance, Jagannathan and Wang (1998) discuss cross sectional regression models; Kan and Zhang (1999) study asset pricing models when one of the proposed factors is in fact useless; Campbell and Cochrane (2000) explain why the CAPM and its extensions are better at approximating asset pricing models than the standard consumption-based asset pricing theory; Hodrick and Zhang (2001) evaluate the specification errors of several empirical asset pricing models that have been developed as potential improvements on the CAPM; Lettau and Ludvigson (2001) explain the cross section of average stock returns; Jagannathan and Wang (2002) compare the SDF method with the Beta method in estimating risk premium; Vassalou (2003) studies models that include a factor that captures news related to future Gross Domestic Product (GDP) growth; Jacobs and Wang (2004) investigate the importance of idiosyncratic consumption risk for the cross sectional variation in asset returns; Vassalou and Xing (2004) compute default measures for individual firms; Huang and Wu (2004) analyze the specifications of option pricing models based on time-changed Levy process; and Parker and Julliard (2005) evaluate the consumption capital asset pricing model in which an asset's expected return is determined by its equilibrium risk to consumption. Some other works test econometric specifications using the HJ-distance, including Bansal and Zhou (2002) and Shapiro (2002); Dittmar (2002) uses the HJ-distance to estimate the nonlinear pricing kernels in which the risk factor is endogenously determined and preferences restrict the definition of the pricing kernel.…”