Carol Elliott | July 10, 2018
Investors seeking ways to predict future stock returns might consider checking an unusual source of information: the electric bill.
Research from the University of Notre Dame’s Mendoza College of Business suggests that the growth rate of industrial electricity usage predicts future stock returns for up to one year.
For his work on the study, Notre Dame finance professor Zhi Da, co-author of “Industrial Electricity Usage and Stock Returns,” was honored in May with the 2017 William F. Sharpe Award from the Journal of Financial and Quantitative Analysis, one of the nation’s leading finance journals.
The William F. Sharpe Award for Scholarship in Financial Research recognizes researchers who, through their articles published in the JFQA, have most contributed to the understanding of important areas of financial economics. Nominees for the Sharpe Award are chosen by a vote of JFQA readers and associate editors. The final selection is made by JFQA managing editors.
The Sharpe Award is intended to foster excellence in financial research. Recipients receive a $5,000 prize for the best article published each year in the JFQA.
Da’s co-authors included Dayong Huang of the University of North Carolina at Greensboro and Hayong Yun of Michigan State University.
According to the paper, industrial electricity usage tracks the output of the most cyclical sectors. So high rate of growth for industrial electricity usage today — indicating an increase in production due to a company’s expectation of increased sales — predicts low stock returns in the future, consistent with a principle called the countercyclical risk premium. This principle essentially states that the market premium tends to run counter to the business cycle.
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