We show that the previously documented predictability of macroeconomic and technical variables for market returns is also evident in individual stock returns. Technical variables generate better predictability on firms with high limits to arbitrage (small, illiquid, volatile firms), while macroeconomic variables better predict firms with low limits to arbitrage. Technical predictors show a stronger predictive power for high limits to arbitrage firms across the business cycle, whereas macroeconomic variables capture more predictive information for firms with low limits to arbitrage during recessions.
AmihudY (2002) Illiquidity and stock returns: Cross-section and time-series effects. Journal of Financial Markets5: 31–56.
2.
ArenaMPHaggardKSYanX (2008) Price momentum and idiosyncratic volatility. Financial Review43: 159–190.
3.
AvramovDChordiaT (2006) Asset pricing models and financial market anomalies. The Review of Financial Studies19: 1001–1040.
4.
BarberisNShleiferAVishnyR (1998) A model of investor sentiment. Journal of Financial Economics49: 307–343.
5.
BotosanCAPlumleeMAWenH (2011) The relation between expected returns, realized returns, and firm risk characteristics. Contemporary Accounting Research28: 1085–1122.
6.
BoudoukhJMichaelyRRichardsonM, et al. (2007) On the importance of measuring payout yield: Implications for empirical asset pricing. Journal of Finance62: 877–915.
7.
BrockWLakonishokJLeBaronB (1992) Simple technical trading rules and the stochastic properties of stock returns. Journal of Finance47: 1731–1764.
8.
BrownDJenningsR (1989.) On technical analysis. Review of Financial Studies2: 527–551.
9.
CampbellJYThompsonSB (2008) Predicting excess stock returns out of sample: Can anything beat the historical average?The Review of Financial Studies21: 1509–1531.
10.
CampbellJYLettauMMalkielBG, et al. (2001) Have individual stocks become more volatile? An empirical exploration of idiosyncratic risk. Journal of Finance56: 1–43.
11.
ChanKCChenNF (1991) Structural and return characteristics of small and large firms. Journal of Finance46: 1467–1484.
12.
ChanKCChenNFHsiehDA (1985) An exploratory investigation of the firm size effect. Journal of Financial Economics14: 451–471.
13.
ChenNFMahajanA (2010) Effects of macroeconomic conditions on corporate liquidity: International evidence. International Research Journal of Finance and Economics35: 112–129.
14.
ChenNFRollRRossSA (1986) Economic forces and the stock market. Journal of Business59: 383–403.
15.
ChristensenPOFelthamGAWuMG (2002) “Cost of capital” in residual income for performance evaluation. The Accounting Review77: 1–23.
16.
De LongJBShleiferASummersLH, et al. (1990) Noise trader risk in financial markets. Journal of Political Economy98: 703–738.
17.
FamaEFFrenchKR (1989) Business conditions and expected returns on stocks and bonds. Journal of Financial Economics25: 23–49.
18.
GoyalAWelchI (2008) A comprehensive look at the empirical performance of equity premium prediction. The Review of Financial Studies21: 1455–1508.
19.
GrundyBDKimY (2002) Stock market volatility in a heterogeneous information economy. Journal of Financial and Quantitative Analysis37: 1–27.
20.
GuptaSWiltonPC (1987) Combination of forecasts: An extension. Management Science33: 356–372.
21.
HongHSteinJC (1999) A unified theory of underreaction, momentum trading, and overreaction in asset markets. The Journal of Finance54: 2143–2184.
22.
HuGXChenCShaoY, et al. (2019) Fama-French in China: Size and value factors in Chinese stock returns. International Review of Finance19: 3–44.
23.
JegadeeshNTitmanS (2001) Profitability of momentum strategies: An evaluation of alternative explanations. Journal of Finance56: 699–720.
24.
KandelSStambaughRF (1996) On the predictability of stock returns: An asset-allocation perspective. The Journal of Finance51: 385–424.
25.
LamFECWeiKJ (2011) Limits-to-arbitrage, investment frictions, and the asset growth anomaly. Journal of Financial Economics102: 127–149.
26.
LeeCMSwaminathanB (2000) Price momentum and trading volume. Journal of Finance55: 2017–2069.
27.
LesmondDASchillMJZhouC (2004) The illusory nature of momentum profits. Journal of Financial Economics71: 349–380.
28.
LiDZhangL (2010) Does Q-theory with investment frictions explain anomalies in the cross section of returns?Journal of Financial Economics98: 297–314.
29.
LoAWMacKinlayAC (1997) Maximizing predictability in the stock and bond markets. Macroeconomic Dynamics1: 102–134.
30.
LudvigsonSCNgS (2007) The empirical risk-return relation: A factor analysis approach. Journal of Financial Economics83: 171–222.
31.
McLeanRD (2010) Idiosyncratic risk, long-term reversal, and momentum. Journal of Financial and Quantitative Analysis45: 883–906.
32.
MohanramPGodeD (2013) Removing predictable analyst forecast errors to improve implied cost of equity estimates. Review of Accounting Studies18: 443–478.
33.
MookerjeeRYuQ (1997) Macroeconomic variables and stock prices in a small open economy: The case of Singapore. Pacific-basin Finance Journal5: 377–388.
34.
NeelyCJRapachDETuJ, et al. (2014) Forecasting the equity risk premium: The role of technical indicators. Management Science60: 1772–1791.
35.
PengLXiongW (2006) Investor attention, overconfidence and category learning. Journal of Financial Economics80: 563–602.
36.
PesaranMHTimmermannA (1995) Predictability of stock returns: Robustness and economic significance. Journal of Finance50: 1201–1228.
37.
RapachDEStraussJKZhouG (2010) Out-of-sample equity premium prediction: Combination forecasts and links to the real economy. The Review of Financial Studies23: 821–862.
38.
RobichekAACohnRA (1974) The economic determinants of systematic risk. The Journal of Finance29: 439–447.
39.
ShleiferAVishnyRW (1997) The limits of arbitrage. Journal of Finance52: 35–55.
40.
StambaughRFYuJYuanY (2012) The short of it: Investor sentiment and anomalies. Journal of Financial Economics104: 288–302.
41.
WhitedTMWuG (2006) Financial constraints risk. The Review of Financial Studies19: 531–559.
42.
ZhuF (2014) Corporate governance and the cost of capital: An international study. International Review of Finance14: 393–429.
43.
ZhuYZhouG (2009) Technical analysis: An asset allocation perspective on the use of moving averages. Journal of Financial Economics92: 519–544.
