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The role of stock markets vs. the term spread in forecasting macrovariables in Finland

  • Kuosmanen, Petri
  • Vataja, Juuso
Registered author(s):

    A substantial body of stylized facts and empirical evidence exists regarding the relationships between financial variables and the macroeconomy in the United States. However, the question of whether this evidence is consistent with the cases of small open economies is less known. This paper focuses on the forecasting content of stock returns and volatility vs. the term spread for GDP, private consumption, industrial production and the inflation rate in Finland. Our results suggest that during normal times, the term spread is a much better tool than stock market variables for predicting real activity. However, during exceptional times, such as the recent financial crisis, the forecast performance is improved by combining the term spread and the stock market information.

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    File URL: http://www.sciencedirect.com/science/article/pii/S1062976911000068
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    Article provided by Elsevier in its journal The Quarterly Review of Economics and Finance.

    Volume (Year): 51 (2011)
    Issue (Month): 2 (May)
    Pages: 124-132

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    Handle: RePEc:eee:quaeco:v:51:y:2011:i:2:p:124-132
    Contact details of provider: Web page: http://www.elsevier.com/locate/inca/620167

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    7. 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.
    8. Harvey, Campbell R., 1988. "The real term structure and consumption growth," Journal of Financial Economics, Elsevier, vol. 22(2), pages 305-333, December.
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