Abstract
This paper investigates whether the information of the financial stress index has predictive power for stock returns. The empirical results show that the financial stress index is efficient in predicting stock returns. In addition, the financial stress index can provide incremental information based on 14 traditional macroeconomic variables. Considering different investor risk aversion coefficients, the financial stress index has the highest CER and SR gains among the predictors. Our paper tries to provide new evidence for stock return predictability from the perspective of financial stress.
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