Forecasting Economic Fundamentals and Stock Returns with Equity Market Order Flows: Macro Information in a Micro Measure?
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Abstract
| This paper examines the information content of two aggregate equity market order-flow measures for future macroeconomic fundamentals and expected stock market returns. The cross-sectional average of individual stock order-flows predicts industrial production and real GDP growth, but not corporate earnings growth, in certain subsequent quarters in the presence of a host of control variables including common return factors, experts’ earnings growth forecasts, default and term spreads, new equity capital, and market wide liquidity. The difference between the average order-flow for big stocks and the average order-flow for small stocks has a strong and robust forecast power for industrial production and real GDP as well as corporate earnings growth up to four quarters ahead. The fact that the information in the two order-flow-based measures is not subsumed by common return factors suggests a role for aggregate order-flows in predicting stock market returns. We show that a positive shock to the latter measure forecasts greater returns for ten size sorted portfolios and an increase in both the market and size premiums in the subsequent quarter. These findings are consistent with a world where aggregate order-flow brings together dispersed information from heterogeneously informed investors. |
| Contact information: |
| Myra Lissenberg |
