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Are sectoral stock prices useful for predicting euro area GDP?

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Author Info
Andersson, Magnus (European Central Bank)
D'Agostino, Antonello (Central Bank and Financial Services Authority of Ireland)
Abstract

This paper evaluates how well sectoral stock prices forecast future economic activity compared to traditional predictors such as the term spread, dividend yield, exchange rates and money growth. The study is applied to euro area financial asset prices and real economic growth, covering the period 1973 to 2006. The paper finds that the term spread is the best predictor of future growth in the period leading up to the introduction of Monetary Union. After 1999, however, sectoral stock prices in general provide more accurate forecasts than traditional asset price measures across all forecast horizons.

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Paper provided by Central Bank & Financial Services Authority of Ireland (CBFSAI) in its series Research Technical Papers with number 2/RT/08.

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Length: 19 pages
Date of creation: Apr 2008
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Handle: RePEc:cbi:wpaper:2/rt/08

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C52 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Evaluation and Testing
C53 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Forecasting and Other Model Applications

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  1. McCracken, Michael W., 2007. "Asymptotics for out of sample tests of Granger causality," Journal of Econometrics, Elsevier, vol. 140(2), pages 719-752, October. [Downloadable!] (restricted)
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  3. Lieven Baele & Annalisa Ferrando & Peter Hördahl & Elizaveta Krylova & Cyril Monnet, 2004. "Measuring financial integration in the euro area," Occasional Paper Series 14, European Central Bank. [Downloadable!]
  4. Luigi Guiso & Monica Paiella & Ignazio Visco, 2005. "Do capital gains affect consumption? Estimates of wealth effects from Italian householdsÂ’ behavior," Temi di discussione (Economic working papers) 555, Bank of Italy, Economic Research Department. [Downloadable!]
  5. Fabio Moneta, 2003. "Does the yield spread predict recessions in the euro area?," Working Paper Series 294, European Central Bank. [Downloadable!]
  6. Smets, Frank & Tsatsaronis, Kostas, 1997. "Why Does the Yield Curve Predict Economic Activity? Dissecting the Evidence for Germany and the United States," CEPR Discussion Papers 1758, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
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  7. Paiella, Monica, 2007. "Does wealth affect consumption? Evidence for Italy," Journal of Macroeconomics, Elsevier, vol. 29(1), pages 189-205, March. [Downloadable!] (restricted)
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  8. Diebold, Francis X & Mariano, Roberto S, 1995. "Comparing Predictive Accuracy," Journal of Business & Economic Statistics, American Statistical Association, vol. 13(3), pages 253-63, July.
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  9. Andrews, Donald W K, 1993. "Tests for Parameter Instability and Structural Change with Unknown Change Point," Econometrica, Econometric Society, vol. 61(4), pages 821-56, July. [Downloadable!] (restricted)
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