Purpose: In this study, we empirically demonstrate how the new variable of "cyclical consumption" can capture consumption risk and predict expected stock returns, which relationship is stronger and should be considered as the primary macro indicator for stock markets between KOSPI and KOSDAQ, and which specific industries exhibit stronger or weaker relationship with cyclical consumption in the Korean capital market. Design/methodology/approach: The basic research design is composed of three approaches as follows: After testing the predictability of "cyclical consumption" for the overall market returns, we examine whether or not there are differential characteristics in return predictability between two capital markets in Korea, KOSPI and KOSDAQ. Then, we analyze which specific industries have stronger or weaker relationship with the consumption. To explore these main issues, we apply such models as return predictive regressions, alternative detrending methods, external habit model, and others. Hamilton(2018)'s detrending method plays a key role in constructing the appropriate cyclical consumption and in running return predictive regressions. Findings: First, cyclical consumption has a statistically significant inverse relationship with market returns; moreover, the more accumulated the market returns(up to five years), the stronger the relationship, and the result holds during both boom and recession periods. Second, cyclical consumption has stronger inverse relationship with KOSPI than KOSDAQ market and only KOSPI market shows statistical significance. Third, the relationship with cyclical consumption can also be applied to almost 11 industry portfolios for KOSPI, such as finance, manufacturing, electronics, and other 8 industries among 22 sample industries. Research limitations/implications: The results from this study can be widely used by investors, policy makers and other market participants in constructing investment strategies and in designing macroeconomic policies and market micro structures. In particular, investors can utilize the results in constructing individual portfolios for some industries. The shortage of data for the various consumption variables in Korea is the limitation of this study. Originality/value: This is the first paper to prove the relationship between the 'cyclical' consumption and stock returns in Korea. The differential characteristics between KOSPI and KOSDAQ and among industries are newly added value. In addition, this study can stimulate further research in other countries for enhancing the generality of the results.
