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Predictive ability of financial variables in changing economic circumstances

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  • Kuosmanen, Petri
  • Rahko, Jaana
  • Vataja, Juuso

Abstract

We analyze three key financial variables, the term spread, real stock returns and the real short-term interest rate, and study which economic factors underlie changes in their predictive power for GDP growth in a large set of industrialized countries. Our results show that the enhanced predictive content of financial variables is connected to increased GDP and stock market volatility as well as turning points in business cycles. Periods with a zero lower bound of interest rates appear to reduce the predictive ability of stock markets. Moreover, we find qualified evidence that inflation persistence increases the predictive content of financial variables.

Suggested Citation

  • Kuosmanen, Petri & Rahko, Jaana & Vataja, Juuso, 2019. "Predictive ability of financial variables in changing economic circumstances," The North American Journal of Economics and Finance, Elsevier, vol. 47(C), pages 37-47.
    • Handle: RePEc:eee:ecofin:v:47:y:2019:i:c:p:37-47
    DOI: 10.1016/j.najef.2018.11.012
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    More about this item

    Keywords

    Term spread; Short-term interest rates; Stock market; Forecasting; Macroeconomy;
    All these keywords.

    JEL classification:

    • E37 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Forecasting and Simulation: Models and Applications
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • E47 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Forecasting and Simulation: Models and Applications

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