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The Predictive Role of Stock Market Return for Real Activity in Thailand

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  • Komain Jiranyakul

    (School of Development Economics, National Institute of Development Administration Bangkok, Thailand)

Abstract

Stock market return is one of financial variables that contain information to forecast real activity such as industrial production and real GDP growth. However, it is still controversial that stock market return can have a predictive content on real activity. This paper attempts to investigate the ability of stock market return to predict industrial production growth (or real activity) in Thailand, which is an emerging market economy. The standard causality test and the equal forecast evaluation of nested models are employed. For the purpose of forecasting, the data are divided into two periods: the data for the in-sample and the out-of-sample periods. The test of equal forecasting ability is also used. Using monthly data from January 1993 to December 2011, it is found that the model augmented with stock return variable outperforms the benchmark model in the forecast horizon of two months. The results seem to support the notion that stock market return is a predictor of industrial output growth in the short run. Moreover, the standard Granger causality test using the in-sample data also supports this notion. The findings offers a useful insight to investors, financial managers and policymakers on the role of stock market return in forecasting real economic activity. Specifically, a change in stock market return is a signal for revising investment decision by investors and portfolio managers.

Suggested Citation

  • Komain Jiranyakul, 2013. "The Predictive Role of Stock Market Return for Real Activity in Thailand," Asian Journal of Empirical Research, Asian Economic and Social Society, vol. 3(3), pages 317-328, March.
  • Handle: RePEc:asi:ajoerj:2013:p:317-328
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    References listed on IDEAS

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    1. Dumas, Bernard & Harvey, Campbell R. & Ruiz, Pierre, 2003. "Are correlations of stock returns justified by subsequent changes in national outputs?," Journal of International Money and Finance, Elsevier, vol. 22(6), pages 777-811, November.
    2. Panopoulou, Ekaterini, 2007. "Predictive financial models of the euro area: A new evaluation test," International Journal of Forecasting, Elsevier, vol. 23(4), pages 695-705.
    3. Mansor H. Ibrahim, 2010. "An Empirical Analysis of Real Activity and Stock Returns in an Emerging Market," Economic Analysis and Policy, Elsevier, vol. 40(2), pages 263-271, September.
    4. Jay Choi, Jongmoo & Hauser, Shmuel & Kopecky, Kenneth J., 1999. "Does the stock market predict real activity? Time series evidence from the G-7 countries," Journal of Banking & Finance, Elsevier, vol. 23(12), pages 1771-1792, December.
    5. Tsouma, Ekaterini, 2009. "Stock returns and economic activity in mature and emerging markets," The Quarterly Review of Economics and Finance, Elsevier, vol. 49(2), pages 668-685, May.
    6. J. Bradford De Long & Lawrence H. Summers, 1991. "Equipment Investment and Economic Growth," The Quarterly Journal of Economics, Oxford University Press, vol. 106(2), pages 445-502.
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    Cited by:

    1. Shahbaz, Muhammad & Ur Rehman, Ijaz & Zainudin, Rozaimah, 2013. "Macroeconomic Determinants of Stock Market Capitalization in Pakistan:Fresh Evidence from Cointegration with unknown Structural breaks," MPRA Paper 52490, University Library of Munich, Germany, revised 24 Dec 2013.

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