Abstract
We show that China's real estate climate index (RECI) can be used to forecast the aggregate stock market return. It outperforms popular return predictors both in- and out-of-sample, especially at the monthly horizon. Additionally, RECI's predictive ability is stronger among stocks of small market capitalization and low momentum. For a typical mean-variance investor, RECI's predictive power may provide an additional utility gain of 3.41%. We discuss three potential sources of RECI's predictive ability and present the corresponding evidence, including the cash flow channel, the firm fundamental channel, and the investment substitution channel.
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