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Are sectoral stock prices useful for predicting euro area GDP?

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  • Andersson, Magnus
  • D’Agostino, Antonello

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. JEL Classification: C52, C53

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Bibliographic Info

Paper provided by European Central Bank in its series Working Paper Series with number 0876.

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Date of creation: Feb 2008
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Handle: RePEc:ecb:ecbwps:20080876

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Keywords: asset prices; forecasting models;

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  1. Todd Clark & Michael McCracken, 2005. "Evaluating Direct Multistep Forecasts," Econometric Reviews, Taylor & Francis Journals, vol. 24(4), pages 369-404.
  2. 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.
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  5. Donald W.K. Andrews, 1990. "Tests for Parameter Instability and Structural Change with Unknown Change Point," Cowles Foundation Discussion Papers 943, Cowles Foundation for Research in Economics, Yale University.
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  7. 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 and International Relations Area.
  8. Moneta, Fabio, 2003. "Does the yield spread predict recessions in the euro area?," Working Paper Series 0294, European Central Bank.
  9. Frank Browne & David Doran, 2005. "Do equity index industry groups improve forecasts of inflation and production? A US analysis," Applied Economics, Taylor & Francis Journals, vol. 37(15), pages 1801-1812.
  10. McCracken, Michael W., 2007. "Asymptotics for out of sample tests of Granger causality," Journal of Econometrics, Elsevier, vol. 140(2), pages 719-752, October.
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