Financial Variables and the Out-of-Sample Forecastability of the Growth Rate of Indian Industrial Production
AbstractIn this paper, we consider the forecasting power, both in- and out-of-sample, of 11 financial variables with respect to the growth rate of Indian industrial production over the monthly out-of-sample period of 2005:4-2011:4, using an in-sample of 1994:1-2005:3. The financial variables used are: M0, M1, M2, M3, lending rate, 3-month Treasury bill rate, term spread, real effective exchange rate, real stock prices, dividend yield and non-food credit growth. We observe that that in-sample and out-of-sample predictive ability of the financial variables tend to coincide. We find strong evidence of out-of-sample predictability for at least one of the horizons for M0, M1, M2, M3, the lending rate and real share price growth rate. The term-spread and dividend yield are added to the list when weaker versions of the out-of-sample test statistics are considered as well. Given that we consider a large number of financial variables, when we checked the significant results by accounting for data mining across the 11 financial variables, majority of these results ceases to be significant, with only M0, M1 and M2 retaining some of its predictive ability.
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Bibliographic InfoPaper provided by University of Pretoria, Department of Economics in its series Working Papers with number 201135.
Length: 14 pages
Date of creation: Dec 2011
Date of revision:
Nominal Financial Variables; Forecastablity; Forecast Encompassing; Industrial Production; India;
Find related papers by JEL classification:
- C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models &bull Diffusion Processes
- 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
- E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
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