Sectoral Corporate Profits and Long‐Run Stock Return Volatility in the United States: A GARCH‐MIDAS Approach

Abstract

This study aims to examine the usefulness of corporate profits in predicting the return volatility of sectoral stocks in the United States. We use a GARCH‐MIDAS approach to keep the datasets in their original frequencies. The results show a consistently positive slope coefficient across various sectoral stocks. This implies that higher profits lead to increased trading of stocks and, subsequently, a higher volatility in the long run than usual. Furthermore, the analysis also extends to predictability beyond the in‐sample. We find strong evidence that corporate profits can predict the out‐of‐sample long‐run return volatility of sectoral stocks in the United States. These findings are significant for investors and portfolio managers.