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

  • Ólan T. Henry
  • Nilss Olekalns

    ()

  • Jonathan Thong

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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File URL: http://hdl.handle.net/10.1007/s00181-003-0182-4
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Article provided by Springer in its journal Empirical Economics.

Volume (Year): 29 (2004)
Issue (Month): 3 (09)
Pages: 527-540

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Handle: RePEc:spr:empeco:v:29:y:2004:i:3:p:527-540
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