Senior Fellows/Fellows

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Senior Fellows/Fellows

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May 2022

Idiosyncrasy as a Leading Indicator

Disequilibrating macro shocks affect different firms' prospects differently, increasing idiosyncratic variation in forward-looking stock returns before affecting economic growth. Consistent with most such shocks from 1947 to 2020 enhancing productivity, increased idiosyncratic stock return variation forecasts next-quarter real GDP growth, industrial production growth, and consumption growth both in-sample and out-of-sample. These effects persist after controlling for other leading economic indicators.
Keywords: Subjective expectations, business-level uncertainty
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