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Stock returns and the short-run predictability of health expenditure: Some empirical evidence

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  • Wang, Zijun
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    Abstract

    The rising cost of health care, compounded with an aging population, has been the subject of constant discussion in the popular media. Accurate forecasts of health care expenditure are therefore important for both policy makers and industrial practitioners. Extending a branch of the macroeconomics literature that examines the role of asset prices as useful predictors of major macro variables (such as consumption, output growth and inflation), this study investigates whether the current equity market captures useful information on the growth of future health care expenditure. We focus on short-run (one-year) predictability. The preliminary evidence based on US data shows that industry-specific stock returns have some predictive power for personal health care expenditure and its major components (hospital care, durable medical equipment and prescription drugs). Nevertheless, the significance of the improvement in forecasting accuracy depends on the estimation scheme and whether parameter inconstancy is accounted for.

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    Bibliographic Info

    Article provided by Elsevier in its journal International Journal of Forecasting.

    Volume (Year): 25 (2009)
    Issue (Month): 3 (July)
    Pages: 587-601

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    Handle: RePEc:eee:intfor:v:25:y:2009:i:3:p:587-601

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    Web page: http://www.elsevier.com/locate/ijforecast

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    Keywords: Health expenditure predictability Stock returns Structural breaks Forecast comparisons;

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    1. Fama, Eugene F. & French, Kenneth R., 1997. "Industry costs of equity," Journal of Financial Economics, Elsevier, vol. 43(2), pages 153-193, February.
    2. Valentina Corradi & Norman Swanson, 2006. "Predictive Density Evaluation. Revised," Departmental Working Papers 200621, Rutgers University, Department of Economics.
    3. Johansen, Soren, 1988. "Statistical analysis of cointegration vectors," Journal of Economic Dynamics and Control, Elsevier, vol. 12(2-3), pages 231-254.
    4. James H. Stock & Mark W.Watson, 2003. "Forecasting Output and Inflation: The Role of Asset Prices," Journal of Economic Literature, American Economic Association, vol. 41(3), pages 788-829, September.
    5. Johansen, Soren, 1991. "Estimation and Hypothesis Testing of Cointegration Vectors in Gaussian Vector Autoregressive Models," Econometrica, Econometric Society, vol. 59(6), pages 1551-80, November.
    6. Valentina Corradi & Norman Swanson, 2004. "Predictive Density Evaluation," Departmental Working Papers 200419, Rutgers University, Department of Economics.
    7. Zijun Wang, 2006. "The joint determination of the number and the type of structural changes," Economics Letters, Elsevier, vol. 93(2), pages 222-227, November.
    8. Narayan, Paresh Kumar, 2006. "Examining structural breaks and growth rates in international health expenditures," Journal of Health Economics, Elsevier, vol. 25(5), pages 877-890, September.
    9. Jewell, Todd & Lee, Junsoo & Tieslau, Margie & Strazicich, Mark C., 2003. "Stationarity of health expenditures and GDP: evidence from panel unit root tests with heterogeneous structural breaks," Journal of Health Economics, Elsevier, vol. 22(2), pages 313-323, March.
    10. Armstrong, J. Scott & Collopy, Fred, 1992. "Error measures for generalizing about forecasting methods: Empirical comparisons," International Journal of Forecasting, Elsevier, vol. 8(1), pages 69-80, June.
    11. Pesaran, M. Hashem & Timmermann, Allan, 2007. "Selection of estimation window in the presence of breaks," Journal of Econometrics, Elsevier, vol. 137(1), pages 134-161, March.
    12. Swanson, Norman R., 1998. "Money and output viewed through a rolling window," Journal of Monetary Economics, Elsevier, vol. 41(3), pages 455-474, May.
    13. Pedro Pita Barros, 1998. "The black box of health care expenditure growth determinants," Health Economics, John Wiley & Sons, Ltd., vol. 7(6), pages 533-544.
    14. Rettenmaier, Andrew J. & Wang, Zijun, 2006. "Persistence in Medicare reimbursements and personal medical accounts," Journal of Health Economics, Elsevier, vol. 25(1), pages 39-57, January.
    15. Kris Jacobs & Kevin Q. Wang, 2004. "Idiosyncratic Consumption Risk and the Cross Section of Asset Returns," Journal of Finance, American Finance Association, vol. 59(5), pages 2211-2252, October.
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