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Do stock prices contain predictive power for the future economic activity? A Granger causality analysis in the frequency domain

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  • Croux, Christophe
  • Reusens, Peter

Abstract

This paper investigates the predictive power for the future domestic economic activity included in the domestic stock prices, using a Granger causality analysis in the frequency domain. We are able to evaluate whether the predictive power is concentrated at the slowly fluctuating components or at the quickly fluctuating components. Using 1991Q1–2010Q2 quarterly data, for the G-7 countries, we found that the slowly fluctuating components of the stock prices have large predictive power for the future GDP, while this is not the case for the quickly fluctuating components. This finding holds both in a single-country setting and in a multi-country setting. Therefore, macro-economic policy makers could use the slowly fluctuating components of the stock prices to improve their predictions of the future GDP.

Suggested Citation

  • Croux, Christophe & Reusens, Peter, 2013. "Do stock prices contain predictive power for the future economic activity? A Granger causality analysis in the frequency domain," Journal of Macroeconomics, Elsevier, vol. 35(C), pages 93-103.
  • Handle: RePEc:eee:jmacro:v:35:y:2013:i:c:p:93-103
    DOI: 10.1016/j.jmacro.2012.10.001
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    More about this item

    Keywords

    Frequency domain; Granger causality; Gross domestic product; Predictive power; Stock prices;

    JEL classification:

    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles

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