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Finance Research Letters
Highlights
The aggressive stock-selection opportunity is defined by the average of
cross-sectional stocks’ positive alphas plus idiosyncratic volatilities.
The change of aggressive stock-selection opportunity ( ) can
significantly and negatively predict stock market returns.
The aggressive stock-selection opportunities in the market have stronger
predictive information rather than the moderate stock-selection opportunities.
The predictive role of is not induced by the potential predictive
power of the average of positive alphas and the average of idiosyncratic
volatilities.
Abstract
We propose a measurement of aggressive stock-selection opportunity based on
positive alphas and idiosyncratic volatilities of cross-section stocks, and examine the
role of aggressive stock-selection opportunity in predicting stock market returns. For
the US stock market, we find that the change of aggressive stock-selection
opportunity has a significant and negative coefficient for predicting future one-month
market returns. The out-of-sample results also show the change of aggressive
stock-selection opportunity improves the return forecasting performance and increases
investors’ economic values. In particular, the predictive information of the change of
aggressive stock-selection opportunity is independent of traditional macroeconomic
predictors.