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Davids, Goliaths, and Business Cycles

Published online by Cambridge University Press:  27 December 2017

Jefferson Duarte  and
Nishad Kapadia
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Abstract

We show that a simple, intuitive variable, Goliath versus David (GVD), reflects time variation in discount rates related to changes in aggregate business conditions. GVD is the annual change in the weight of the largest 250 firms in the aggregate stock market and is motivated by research that shows that small firms are more severely impacted than large firms by economic shocks due to differences in access to external finance. We find that GVD is the best single predictor of out-of-sample market returns among traditional predictors, predicting quarterly market returns with an out-of-sample R2 of 6.3% in the 1976–2011 evaluation period.

Type
Research Article
Information
Journal of Financial and Quantitative Analysis , Volume 52 , Issue 6 , December 2017 , pp. 2429 - 2460
Copyright
Copyright © Michael G. Foster School of Business, University of Washington 2017 

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Footnotes

1

We give special thanks to Hendrik Bessembinder (the editor) and Jeffrey Pontiff (associate editor and referee) for many helpful suggestions. We also thank Caio de Almeida, Heitor Almeida, Kerry Back, Murillo Campello, Miguel Ferreira, Wayne Ferson, Michael Lemmon, Michael McCracken, Brad Paye, Sergei Sarkissian, Allan Timmermann, Pietro Veronesi, James Weston, our colleagues at Rice University, as well as seminar participants at the 2012 Brazilian Finance Association meeting, the 2013 World Finance Conference, the 2013 European Financial Management Association meeting, the 2014 City University of Hong Kong finance conference, Erasmus University Rotterdam, Tilburg University, University of New South Wales, University of Sydney, and University of Technology Sydney for helpful comments. All remaining errors are our own.

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