Real aggregate activity and stock returns

The notion that real aggregate activity exerts important influence on stock returns has strong theoretical appeal but weak empirical support. We argue in this paper that the lack of empirical reaction to macro news might be at least partly due to the usual focus on macro variables, which are noisy measures of real aggregate activity or the common factor. To test our conjecture, we focus on the Chicago Fed National Activity Index (CFNAI-MA3), a single summary measure of the common factor in 85 macro variables. Our main finding is that the news component of this index does affect stock returns. The effects show up at the market level as well as at the portfolio level. The effects are not only statistically but also economically significant.

► Real aggregate activity exerts an important influence on stock returns.
► Previous weak empirical support of market response to macro news is due to focus on noisy measures of real aggregate activity.
► The release of CFNAI provides more information about real aggregate activity than the prior releases of the individual underlying variables.
► Our main finding is that the news component of this index does affect stock returns.