Predicting the bear stock market: Macroeconomic variables as leading indicators
This paper investigates whether macroeconomic variables can predict recessions in the stock market, i.e., bear markets. Series such as interest rate spreads, inflation rates, money stocks, aggregate output, unemployment rates, federal funds rates, federal government debt, and nominal exchange rates are evaluated. After using parametric and nonparametric approaches to identify recession periods in the stock market, we consider both in-sample and out-of-sample tests of the variables' predictive ability. Empirical evidence from monthly data on the Standard & Poor's S&P 500 price index suggests that among the macroeconomic variables we have evaluated, yield curve spreads and inflation rates are the most useful predictors of recessions in the US stock market, according to both in-sample and out-of-sample forecasting performance. Moreover, comparing the bear market prediction to the stock return predictability has shown that it is easier to predict bear markets using macroeconomic variables.
If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
As the access to this document is restricted, you may want to look for a different version under "Related research" (further below) or search for a different version of it.
References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Candelon, Bertrand & Piplack, Jan & Straetmans, Stefan, 2008. "On measuring synchronization of bulls and bears: The case of East Asia," Journal of Banking & Finance, Elsevier, vol. 32(6), pages 1022-1035, June.
- Lewellen, Jonathan, 2004. "Predicting returns with financial ratios," Journal of Financial Economics, Elsevier, vol. 74(2), pages 209-235, November.
- Arturo Estrella & Frederic S. Mishkin, 1995.
"Predicting U.S. Recessions: Financial Variables as Leading Indicators,"
NBER Working Papers
5379, National Bureau of Economic Research, Inc.
- Arturo Estrella & Frederic S. Mishkin, 1998. "Predicting U.S. Recessions: Financial Variables As Leading Indicators," The Review of Economics and Statistics, MIT Press, vol. 80(1), pages 45-61, February.
- Arturo Estrella & Frederic S. Mishkin, 1996. "Predicting U.S. recessions: financial variables as leading indicators," Research Paper 9609, Federal Reserve Bank of New York.
- Diebold, Francis X & Mariano, Roberto S, 2002.
"Comparing Predictive Accuracy,"
Journal of Business & Economic Statistics,
American Statistical Association, vol. 20(1), pages 134-44, January.
- Willem Thorbecke, 1998.
"On Stock Market Returns and Monetary Policy,"
- Estrella, Arturo, 1998.
"A New Measure of Fit for Equations with Dichotomous Dependent Variables,"
Journal of Business & Economic Statistics,
American Statistical Association, vol. 16(2), pages 198-205, April.
- Arturo Estrella, 1997. "A new measure of fit for equations with dichotomous dependent variables," Research Paper 9716, Federal Reserve Bank of New York.
- Garcia, Rene, 1998.
"Asymptotic Null Distribution of the Likelihood Ratio Test in Markov Switching Models,"
International Economic Review,
Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 39(3), pages 763-88, August.
- René Garcia, 1995. "Asymptotic Null Distribution of the Likelihood Ratio Test in Markov Switching Models," CIRANO Working Papers 95s-07, CIRANO.
- Cooper, Richard V L, 1974. "Efficient Capital Markets and the Quantity Theory of Money," Journal of Finance, American Finance Association, vol. 29(3), pages 887-908, June.
- Gabriel Perez-Quiros & Allan Timmermann, 2000.
"Firm Size and Cyclical Variations in Stock Returns,"
Journal of Finance,
American Finance Association, vol. 55(3), pages 1229-1262, 06.
- Allan Timmermann & Gabriel Perez-Quiros, 1999. "Firm Size and Cyclical Variations in Stock Returns," FMG Discussion Papers dp335, Financial Markets Group.
- Roberto Rigobon & Brian Sack, 2003. "Measuring The Reaction of Monetary Policy to the Stock Market," The Quarterly Journal of Economics, Oxford University Press, vol. 118(2), pages 639-669.
- Hamburger, Michael J & Kochin, Levis A, 1972. "Money and Stock Prices: The Channels of Influence," Journal of Finance, American Finance Association, vol. 27(2), pages 231-49, May.
- Bohl, Martin T. & Siklos, Pierre L. & Werner, Thomas, 2007. "Do central banks react to the stock market? The case of the Bundesbank," Journal of Banking & Finance, Elsevier, vol. 31(3), pages 719-733, March.
- Maheu, John M & McCurdy, Thomas H, 2000. "Identifying Bull and Bear Markets in Stock Returns," Journal of Business & Economic Statistics, American Statistical Association, vol. 18(1), pages 100-112, January.
- Frauendorfer, Karl & Jacoby, Ulrich & Schwendener, Alvin, 2007. "Regime switching based portfolio selection for pension funds," Journal of Banking & Finance, Elsevier, vol. 31(8), pages 2265-2280, August.
- Arturo Estrella & Anthony P. Rodrigues & Sebastian Schich, 2000.
"How stable is the predictive power of the yield curve? evidence from Germany and the United States,"
113, Federal Reserve Bank of New York.
- Arturo Estrella & Anthony P. Rodrigues & Sebastian Schich, 2003. "How Stable is the Predictive Power of the Yield Curve? Evidence from Germany and the United States," The Review of Economics and Statistics, MIT Press, vol. 85(3), pages 629-644, August.
- Berg, Andrew & Pattillo, Catherine, 1999. "Predicting currency crises:: The indicators approach and an alternative," Journal of International Money and Finance, Elsevier, vol. 18(4), pages 561-586, August.
- Hong, Harrison & Torous, Walter & Valkanov, Rossen, 2007. "Do industries lead stock markets?," Journal of Financial Economics, Elsevier, vol. 83(2), pages 367-396, February.
- Kenneth D. West & Todd Clark, 2006.
"Approximately Normal Tests for Equal Predictive Accuracy in Nested Models,"
NBER Technical Working Papers
0326, National Bureau of Economic Research, Inc.
- Clark, Todd E. & West, Kenneth D., 2007. "Approximately normal tests for equal predictive accuracy in nested models," Journal of Econometrics, Elsevier, vol. 138(1), pages 291-311, May.
- Todd E. Clark & Kenneth D. West, 2005. "Approximately normal tests for equal predictive accuracy in nested models," Research Working Paper RWP 05-05, Federal Reserve Bank of Kansas City.
- Coakley, Jerry & Fuertes, Ana-Maria, 2006. "Valuation ratios and price deviations from fundamentals," Journal of Banking & Finance, Elsevier, vol. 30(8), pages 2325-2346, August.
- Keim, Donald B. & Stambaugh, Robert F., 1986.
"Predicting returns in the stock and bond markets,"
Journal of Financial Economics,
Elsevier, vol. 17(2), pages 357-390, December.
- Donald B. Keim & Robert F. Stambaugh, . "Predicting Returns in the Stock and Bond Markets," Rodney L. White Center for Financial Research Working Papers 15-85, Wharton School Rodney L. White Center for Financial Research.
- Pontiff, Jeffrey & Schall, Lawrence D., 1998. "Book-to-market ratios as predictors of market returns," Journal of Financial Economics, Elsevier, vol. 49(2), pages 141-160, August.
- Rapach, David E. & Wohar, Mark E. & Rangvid, Jesper, 2005. "Macro variables and international stock return predictability," International Journal of Forecasting, Elsevier, vol. 21(1), pages 137-166.
- Francis X. Diebold & Glenn D. Rudebusch, 1987.
"Scoring the leading indicators,"
Special Studies Papers
206, Board of Governors of the Federal Reserve System (U.S.).
When requesting a correction, please mention this item's handle: RePEc:eee:jbfina:v:33:y:2009:i:2:p:211-223. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Zhang, Lei)
If references are entirely missing, you can add them using this form.