Sectoral Corporate Profits and Long-Run Stock Return Volatility in the United States: A GARCH-MIDAS Approach

Abstract

This study aims to examine the usefulness of corporate profits in predicting the return volatility of sectoral stocks in the United States. We use a GARCH-MIDAS approach to keep the datasets in their original frequencies. The results show a consistently positive slope coefficient across various sectoral stocks. This implies that higher profits lead to increased trading of stocks and, subsequently, a higher volatility in the long run than usual. Furthermore, the analysis also extends to predictability beyond the in-sample. We find strong evidence that corporate profits can predict the out-of-sample long-run return volatility of sectoral stocks in the United States. These findings are significant for investors and portfolio managers.