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Have Structural Changes Eliminated the Out-of-Sample Ability of Financial Variables To Forecast Real Activity After the Mid-1980s? Evidence From the Canadian Economy

Author

Listed:
  • Akhter Faroque

    (Department of Economics, Laurentian University)

  • William Veloce

    (Department of Economics, Brock University)

  • Jean-Francois Lamarche

    (Department of Economics, Brock University)

Abstract

The paper evaluates the reliability of the information content of individual financial variables for Canada's future output growth. We estimate the timing of structural changes in linear growth models and check robustness to specification changes, multiple breaks, and business cycle asymmetry. Our out-of-sample forecast evaluation using the MSE-F and the ENC-NEW tests show that the leading information content of most financial variables has deteriorated after 1984:4, but the 1-3 year term spread exhibits a consistently reliable predictive ability at the 1 and 2 quarter horizons and has significant forecasting ability at the 8 quarter horizon. Also, the real M1 money growth has regained its ability to forecast output growth since 1991:1.

Suggested Citation

  • Akhter Faroque & William Veloce & Jean-Francois Lamarche, 2009. "Have Structural Changes Eliminated the Out-of-Sample Ability of Financial Variables To Forecast Real Activity After the Mid-1980s? Evidence From the Canadian Economy," Working Papers 0910, Brock University, Department of Economics, revised Oct 2010.
    • Handle: RePEc:brk:wpaper:0910
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    Cited by:

    1. Rossi, Barbara, 2013. "Advances in Forecasting under Instability," Handbook of Economic Forecasting, in: G. Elliott & C. Granger & A. Timmermann (ed.), Handbook of Economic Forecasting, edition 1, volume 2, chapter 0, pages 1203-1324, Elsevier.
    2. Lyócsa, Štefan & Výrost, Tomáš & Baumöhl, Eduard, 2012. "Breakdowns and revivals: the long-run relationship between the stock market and real economic activity in the G-7 countries," MPRA Paper 43306, University Library of Munich, Germany.

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    More about this item

    Keywords

    Financial indicators; structural change; nested model forecasts; minimum MSFE; encompassing tests;
    All these keywords.

    JEL classification:

    • C52 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Evaluation, Validation, and Selection
    • C53 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Forecasting and Prediction Models; Simulation Methods
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy

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