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Do equity index industry groups improve forecasts of inflation and production? A US analysis

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  • Frank Browne
  • David Doran
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    Abstract

    This study develops a new financial market indicator, which may be a useful addition to analysing real activity in the US. By taking the ratio of the price return of equity industry groups of the S&P 500 over a benchmark industry group, in this case taken to be the Utilities industry group, an indicator is created which represents the price return performance specific to each individual industry. We then perform recursive pseudo out-of-sample bivariate forecasts of future changes in the Industrial Production Index (IPI) and the Consumer Price Index (CPI) at 3-month, 6-month and 12-month horizons using each of the indicators and compare results against an AR forecast. The results of the bivariate forecasts using a number of the indicators produce better forecasts of changes in the IPI and are also significant for causality, both for the full sample period and when tested recursively. Bivariate forecasts of changes to the CPI, however, do not improve upon the AR forecasts.

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    File URL: http://www.tandfonline.com/doi/abs/10.1080/00036840500215394
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    Bibliographic Info

    Article provided by Taylor & Francis Journals in its journal Applied Economics.

    Volume (Year): 37 (2005)
    Issue (Month): 15 ()
    Pages: 1801-1812

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    Handle: RePEc:taf:applec:v:37:y:2005:i:15:p:1801-1812

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    1. 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.
    2. Robert Faff & Richard Heaney, 1999. "An examination of the relationship between Australian industry equity returns and expected inflation," Applied Economics, Taylor & Francis Journals, vol. 31(8), pages 915-933.
    3. Omer Ozcicek & W. DOUGLAS McMILLIN, 1999. "Lag length selection in vector autoregressive models: symmetric and asymmetric lags," Applied Economics, Taylor & Francis Journals, vol. 31(4), pages 517-524.
    4. Jay Choi, Jongmoo & Hauser, Shmuel & Kopecky, Kenneth J., 1999. "Does the stock market predict real activity? Time series evidence from the G-7 countries," Journal of Banking & Finance, Elsevier, vol. 23(12), pages 1771-1792, December.
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    Cited by:
    1. Andersson, Magnus & D'Agostino, Antonello, 2008. "Are sectoral stock prices useful for predicting euro area GDP?," Research Technical Papers 2/RT/08, Central Bank of Ireland.

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