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Do stock market returns predict changes to output? Evidence from a nonlinear panel data model

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  • Ólan T. Henry
  • Nilss Olekalns

    ()

  • Jonathan Thong

Abstract

Recent empirical work suggests a predictive relationship between stock returns and output growth. We employ quarterly data from a panel of 27 countries to test whether stock returns as useful in predicting growth. Unlike previous research, our approach allows for the possible non-linear effect of recessions on the growth-return relationship. There is strong evidence to suggest that a linear model would be misspecified and provide potentially misleading inference. Using a switching regression approach, we find evidence that returns are most useful in predicting growth when the economy is in recession. Copyright Springer-Verlag 2004

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Bibliographic Info

Article provided by Springer in its journal Empirical Economics.

Volume (Year): 29 (2004)
Issue (Month): 3 (09)
Pages: 527-540

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Handle: RePEc:spr:empeco:v:29:y:2004:i:3:p:527-540

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Keywords: Panel data; current depth of recession; stock returns; E32;

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References

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Cited by:
  1. 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, College of Business, and College of Finance, Feng Chia University, Taichung, Taiwan, vol. 7(2), pages 101-124, August.
  2. Boyan Jovanovic, 2007. "Investment Options and the Business Cycle," NBER Working Papers 13307, National Bureau of Economic Research, Inc.
  3. Kuan-Min Wang, 2010. "Expected and Unexpected Impulses of Monetary Policy on the Interest Pass-Through Mechanism in Asian Countries," Annals of Economics and Finance, Society for AEF, vol. 11(1), pages 95-137, May.
  4. Kuosmanen, Petri & Vataja, Juuso, 2014. "Forecasting GDP growth with financial market data in Finland: Revisiting stylized facts in a small open economy during the financial crisis," Review of Financial Economics, Elsevier, vol. 23(2), pages 90-97.
  5. Radoslaw Kurach, 2011. "Eurozone stock returns co-movement: Some findings for portfolio managers and central bankers," Business and Economic Horizons (BEH), Prague Development Center, vol. 5(2), pages 1-12, April.
  6. Kuosmanen, Petri & Vataja, Juuso, 2011. "The role of stock markets vs. the term spread in forecasting macrovariables in Finland," The Quarterly Review of Economics and Finance, Elsevier, vol. 51(2), pages 124-132, May.
  7. Lennard van Gelder & Ad Stokman, 2006. "Regime transplants in GDP growth forecasting: A recipe for better predictions?," DNB Working Papers 106, Netherlands Central Bank, Research Department.

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