The change in stock-selection risk and stock market returns |
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| Institution: | 1. Business School, Sichuan University, Chengdu, China;2. School of Economics & Management, Southwest Jiaotong University, Chengdu, China;3. School of Economics and Finance, Xi''an Jiaotong University, Xi''an, China;4. School of Business and Management, Queen Mary University of London, London, United Kingdom;1. Business School, Sichuan University, Chengdu, China;2. School of Economics & Management, Southwest Jiaotong University, Chengdu, China;3. School of Economics and Finance, Xi''an Jiaotong University, Xi''an, China;4. School of Business and Management, Queen Mary University of London, London, United Kingdom;1. Department of Economics, Management, and Statistics (DEMS), University of Milano-Bicocca, Piazza dell''Ateneo Nuovo, 1, 20126 Milano, MI, Italy;2. Department of Economics, University of Insubria, Varese, Italy;1. University of Liverpool Management School, Chatham Building, Chatham Street, Liverpool L69 7ZH, UK;1. Hull University Business School, University of Hull, Hull HU67RX, United Kingdom;2. China Institute for Actuarial Science, Central University of Finance and Economics, Beijing 100081, China;1. School of Finance, Zhejiang University of Finance and Economics, Hangzhou, China;2. Financial Innovation and Inclusive Finance Research Center, Zhejiang University of Finance and Economics, Hangzhou, China;1. School of Accounting, Xijing University, Xi''an, Shaanxi, China;2. University of Essex, Southend Campus, United Kingdom;3. Southampton Business School, University of Southampton, Southampton, United Kingdom;4. Nanjing Forestry University, China;5. Malaviya National Institute of Technology (MNIT), Jaipur, India |
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| Abstract: | Following Jiang et al. (2021), who propose a stock-selection opportunity (SSO) measurement by the absolute average positive alpha of individual stocks to reflect stock-selection timing, we construct a stock-selection risk (SSR) measure from the perspective of negative alphas of individual stocks. Then, we investigate the predictive abilities of SSO, SSR, the change of SSO (CSSO), and the change of SSR (CSSR) on stock market returns. By using data from 2003 to 2020 in China, we find that only CSSR significantly predicts future one-month market returns. Moreover, considering other popular predictors, our in-sample and out-of-sample results and a series of robustness checks support the proposal that CSSR provides unique information for predicting market returns that reduces forecast errors and increases economic value for investors. Furthermore, our trading activity evidence shows that CSSR predicts stock market returns due to investors' underreaction to the information of CSSR. |
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