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

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Author Info
Ólan T. Henry
Nilss Olekalns ()
Jonathan Thong

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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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File URL: http://hdl.handle.net/10.1007/s00181-003-0182-4
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Publisher 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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Related research
Keywords: Panel data; current depth of recession; stock returns; E32;

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References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
  1. Mohsin S. Khan & A. Senhadji Semlali, . "Financial Development and Economic Growth: An Overview," IMF Working Papers 00/209, International Monetary Fund.
  2. Mullins, Mark & Wadhwani, Sushil B., 1989. "The effect of the stock market on investment: a comparative study," European Economic Review, Elsevier, vol. 33(5), pages 939-956, May. [Downloadable!] (restricted)
  3. Geske, Robert & Roll, Richard, 1983. " The Fiscal and Monetary Linkage between Stock Returns and Inflation," Journal of Finance, American Finance Association, vol. 38(1), pages 1-33, March. [Downloadable!] (restricted)
  4. Bradley, Michael D & Jansen, Dennis W, 1997. "Nonlinear Business Cycle Dynamics: Cross-country Evidence on the Persistence of Aggregate Shocks," Economic Inquiry, Oxford University Press, vol. 35(3), pages 495-509, July.
  5. G. William Schwert, 1990. "Stock Returns and Real Activity: A Century of Evidence," NBER Working Papers 3296, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  6. Benjamin M. Friedman & Kenneth N. Kuttner, 1991. "Why does the paper-bill spread predict real economic activity?," Working Paper Series, Macroeconomic Issues 91-16, Federal Reserve Bank of Chicago.
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  7. Bruce E. Hansen, 1997. "Threshold effects in non-dynamic panels: Estimation, testing and inference," Boston College Working Papers in Economics 365, Boston College Department of Economics. [Downloadable!]
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  8. Anil K Kashyap & Jeremy C. Stein & David W. Wilcox, 1992. "Monetary Policy and Credit Conditions: Evidence From the Composition of External Finance," NBER Working Papers 4015, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  9. Randall Morck & Andrei Shleifer & Robert W. Vishny, 1990. "The Stock Market and Investment: Is the Market a Sideshow?," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 21(1990-2), pages 157-216. [Downloadable!]
  10. Stanley Fischer & Robert C. Merton, 1985. "Macroeconomics and Finance: The Role of the Stock Market," NBER Working Papers 1291, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  11. Prakash Loungani & Mark Rush & William Tave, 1991. "Stock market dispersion and business cycles," Economic Perspectives, Federal Reserve Bank of Chicago, issue Jan, pages 2-8. [Downloadable!]
  12. Fama, Eugene F, 1990. " Stock Returns, Expected Returns, and Real Activity," Journal of Finance, American Finance Association, vol. 45(4), pages 1089-1108, September. [Downloadable!] (restricted)
  13. Stiglitz, Joseph E & Weiss, Andrew, 1981. "Credit Rationing in Markets with Imperfect Information," American Economic Review, American Economic Association, vol. 71(3), pages 393-410, June. [Downloadable!] (restricted)
  14. Binswanger, Mathias, 2000. "Stock Returns and Real Activity: Is There Still a Connection?," Applied Financial Economics, Taylor and Francis Journals, vol. 10(4), pages 379-87, August. [Downloadable!] (restricted)
  15. Fama, Eugene F, 1981. "Stock Returns, Real Activity, Inflation, and Money," American Economic Review, American Economic Association, vol. 71(4), pages 545-65, September. [Downloadable!] (restricted)
  16. Zuliu Hu, 1993. "The Yield Curve and Real Activity," IMF Working Papers 93/19, International Monetary Fund.
  17. Paolo Mauro, 2000. "Stock Returns and Output Growth in Emerging and Advanced Economies," IMF Working Papers 00/89, International Monetary Fund.
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Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Boyan Jovanovic, 2007. "Investment Options and the Business Cycle," NBER Working Papers 13307, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
    Other versions:
  2. 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. [Downloadable!]
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