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Predictive Content of Output and Inflation For Stock Returns and Volatility: Evidence from Selected Asian Countries

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Author Info
Habibullah, M.S.
Baharom, A.H.
Fong , Kin Hing

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Abstract

This study examines the impact of inflation and output growth on stock market returns and volatility in selected Asian countries, namely India, Japan, Korea, Malaysia and Philippines. By using monthly data from 1991 to 2004 and by employing GARCH (1, 1) model, it is found that macroeconomic volatility, which is measured by movement in inflation and output growth, have a weak predictive power for stock market returns and volatility in these countries. The movements of the inflation rate have significant impact to the stock market returns, either positive or negative depending on the inflation rates and their fluctuation in that country. While output growth movements have significant effect to stock market volatility, countries with relatively higher output volatility is associated with higher conditional volatility of stock returns, which is positive effect but is negative for countries which have relatively lower output volatility.

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Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 14114.

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Date of creation: 16 Jan 2009
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Handle: RePEc:pra:mprapa:14114

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Related research
Keywords: Stock returns; volatility; output; inflation; Asian countries;

Find related papers by JEL classification:
G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies
E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy

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  1. Song, Haiyan & Liu, Xiaming & Romilly, Peter, 1998. "Stock Returns and Volatility: An Empirical Study of Chinese Stock Markets," International Review of Applied Economics, Taylor and Francis Journals, vol. 12(1), pages 129-39, January.
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  3. Nicole Davis & Ali M. Kutan, 2003. "Inflation and output as predictors of stock returns and volatility: international evidence," Applied Financial Economics, Taylor and Francis Journals, vol. 13(9), pages 693-700, September. [Downloadable!] (restricted)
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  7. 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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  8. Kaul, Gautam, 1987. "Stock returns and inflation : The role of the monetary sector," Journal of Financial Economics, Elsevier, vol. 18(2), pages 253-276, June. [Downloadable!] (restricted)
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  11. Balvers, Ronald J & Cosimano, Thomas F & McDonald, Bill, 1990. " Predicting Stock Returns in an Efficient Market," Journal of Finance, American Finance Association, vol. 45(4), pages 1109-28, September. [Downloadable!] (restricted)
  12. Engle, Robert F & Lilien, David M & Robins, Russell P, 1987. "Estimating Time Varying Risk Premia in the Term Structure: The Arch-M Model," Econometrica, Econometric Society, vol. 55(2), pages 391-407, March. [Downloadable!] (restricted)
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  15. Gjerde, Oystein & Saettem, Frode, 1999. "Causal relations among stock returns and macroeconomic variables in a small, open economy," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 9(1), pages 61-74, January. [Downloadable!] (restricted)
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