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Industrial output and stock price revisited: an application of the multivariate indirect causality model

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  • Bwo‐Nung Huang
  • Chin‐Wei Yang

Abstract

This paper presents an analysis of the empirical relationship between stock returns, industrial production, money supply, inflation and interest rates across five countries—Canada, France, Japan, Taiwan and the USA. Specifically, we estimate a five‐variable vector autoregression model in order to answer the question: does industrial production predict stock returns directly or indirectly (i.e. does industrial production help predict a variable that itself predicts stock returns)? The key result is that there is no direct and significant statistical relationship in any of the five countries, but there is strong evidence of an indirect relation in Taiwan (via money supply) and another indirect relation in the USA (via interest rate). This indirect causality is verified by examining the relative predictability of stock returns both with and without the additional information. Predictability increases when the indirect relationship is exploited.

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  • Bwo‐Nung Huang & Chin‐Wei Yang, 2004. "Industrial output and stock price revisited: an application of the multivariate indirect causality model," Manchester School, University of Manchester, vol. 72(3), pages 347-362, June.
    • Handle: RePEc:bla:manchs:v:72:y:2004:i:3:p:347-362
    DOI: 10.1111/j.1467-9957.2004.00396.x
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    2. Yuan-Ming Lee & Kuan-Min Wang, 2012. "Searching for a better proxy for business cycles: with supports using US data," Applied Economics, Taylor & Francis Journals, vol. 44(11), pages 1433-1442, April.
    3. Yuan-Ming Lee & Kuan-Min Wang & T. Thanh-Binh Nguyen, 2008. "A Common-Use Proxy for Economic Performance: Application to Asymmetric Causality between the Stock Returns and Growth," International Journal of Business and Economics, School of Management Development, Feng Chia University, Taichung, Taiwan, vol. 7(2), pages 101-124, August.
    4. Giovanis, Eleftherios, 2008. "A panel data analysis for the greenhouse effects in fifteen countries of European Union," MPRA Paper 10321, University Library of Munich, Germany.
    5. R. Ratneswary V. Rasiah, 2010. "Macroeconomic Activity And The Malaysian Stock Market: Empirical Evidence Of Dynamic Relations," The International Journal of Business and Finance Research, The Institute for Business and Finance Research, vol. 4(2), pages 59-69.

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