9733979 Lamont The goal of this CAREER project studies how asset prices both reflect and affect future economic activity. This interdisciplinary research seeks to integrate techniques and ideas from both macroeconomics and asset pricing. The theme is strengthening the connection between economics and finance, both at the academic and applied level. The educational plan seeks to integrate finance and macroeconomics training by exposing students to the close connection between asset prices and economic events and expectations and by using real-world, real-time applications in which students would study either specific companies or specific episodes (such as bond price reactions to inflation news). Financial economists have developed techniques to optimally form portfolios and hedge or replicate specific sources of asset return variation. By fostering greater interaction between finance and economics, a primary goal of this research is to harness this expertise to address economic, and specifically macroeconomic, issues. The research project examined reported capital expenditure plans between 1947-1994. These plans, from a Commerce Department survey, measure expected investment in different industries and across different horizons of between one and four quarters into the future. These data are used to investigate the determinants of investment plans and the revisions to investment (actual minus plan), including the role of the stock market, interest rates, credit conditions, corporate profits, and tax changes. A second research project investigates the relationship between future economic variables and current forecasting portfolio returns. A "forecasting portfolio" is a portfolio of stocks that have been specifically chosen to have maximal predictive power for future economic variables, such as inflation or output. Stock returns contain economic information because they reflect changes in both expected future returns and expected future cash flows. Since these revisions in expe ctations are correlated with revisions in expectations about other economic variables, current stock returns and future economic variables are correlated. ??
