Journal Article

New Orders and Asset Prices

Christopher S. Jones and Selale Tuzel

in The Review of Financial Studies

Published on behalf of The Society for Financial Studies

Volume 26, issue 1, pages 115-157
Published in print January 2013 | ISSN: 0893-9454
Published online November 2012 | e-ISSN: 1465-7368 | DOI: http://dx.doi.org/10.1093/rfs/hhs098
New Orders and Asset Prices

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We investigate the asset pricing and macroeconomic implications of the ratio of new orders (NO) to shipments (S) of durable goods. NO/S measures investment commitments by firms, and high values of NO/S are associated with a business cycle peak. We find that NO/S proxies for a short-horizon component of risk premia not identified in prior work. Higher levels of NO/S forecast lower excess returns on equities and many types of bonds, at horizons from one month to one year. These effects are generally robust to the inclusion of common return predictors and are significant on an out-of-sample basis as well. We also address the term structure of risk premia by constructing a similar ratio to measure longer-term investment commitments, which predicts returns primarily at longer horizons.

Keywords: G12; E32; E44

Journal Article.  18543 words.  Illustrated.

Subjects: Economics ; Prices, Business Fluctuations, and Cycles ; Money and Interest Rates

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