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Do stock market returns predict changes to output? Evidence from a nonlinear panel data model

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  • Ólan T. Henry
  • Nilss Olekalns
  • Jonathan Thong

Abstract

Recent empirical work suggests a predictive relationship between stock returns and output growth. We employ quarterly data from a panel of 27 countries to test whether stock returns as useful in predicting growth. Unlike previous research, our approach allows for the possible non-linear effect of recessions on the growth-return relationship. There is strong evidence to suggest that a linear model would be misspecified and provide potentially misleading inference. Using a switching regression approach, we find evidence that returns are most useful in predicting growth when the economy is in recession. Copyright Springer-Verlag 2004

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  • Ólan T. Henry & Nilss Olekalns & Jonathan Thong, 2004. "Do stock market returns predict changes to output? Evidence from a nonlinear panel data model," Empirical Economics, Springer, vol. 29(3), pages 527-540, September.
    • Handle: RePEc:spr:empeco:v:29:y:2004:i:3:p:527-540
    DOI: 10.1007/s00181-003-0182-4
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    More about this item

    Keywords

    Panel data; current depth of recession; stock returns; E32;
    All these keywords.

    JEL classification:

    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles

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