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Some international evidence on stock prices as leading indicators of economic activity

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  • Anthony Aylward
  • Jack Glen

Abstract

Most asset pricing theories suggest that asset prices are forward looking and reflect market expectations of future earnings. By aggregating across companies, aggregate market prices may then be used as leading indicators of future growth in aggregate income, as well as its constituent components. Data are compiled from 23 countries, including 15 developing countries, in order to examine the ability of stock market prices to predict future economic growth in income, consumption and investment. It is found that stock prices generally have predictive ability, but with substantial variation across countries. Moreover, stocks are substantially better leading indicators of investment than either GDP or consumption. Despite their value as leading indicators, however, stock prices do not generally increase forecasting ability as measured by root mean squared error in out-of-sample forecasting equations.

Suggested Citation

  • Anthony Aylward & Jack Glen, 2000. "Some international evidence on stock prices as leading indicators of economic activity," Applied Financial Economics, Taylor & Francis Journals, vol. 10(1), pages 1-14.
  • Handle: RePEc:taf:apfiec:v:10:y:2000:i:1:p:1-14
    DOI: 10.1080/096031000331879
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    Cited by:

    1. repec:bis:bisbps:95 is not listed on IDEAS
    2. Stijn Claessens & M Ayhan Kose, 2017. "Asset prices and macroeconomic outcomes: a survey," BIS Working Papers 676, Bank for International Settlements.
    3. Liow, Kim Hiang & Webb, James R., 2009. "Common factors in international securitized real estate markets," Review of Financial Economics, Elsevier, vol. 18(2), pages 80-89, April.
    4. Lyócsa, Štefan, 2014. "Growth-returns nexus: Evidence from three Central and Eastern European countries," Economic Modelling, Elsevier, vol. 42(C), pages 343-355.
    5. Camilo Serrano & Martin Hoesli, 2012. "Fractional Cointegration Analysis of Securitized Real Estate," The Journal of Real Estate Finance and Economics, Springer, vol. 44(3), pages 319-338, April.
    6. Nicholas Apergis & Panagiotis G. Artikis, 2016. "Foreign Exchange Risk, Equity Risk Factors and Economic Growth," Atlantic Economic Journal, Springer;International Atlantic Economic Society, vol. 44(4), pages 425-445, December.
    7. Jiranyakul, Komain, 2012. "The Predictive Role of Stock Market Return for Real Activity in Thailand," MPRA Paper 45670, University Library of Munich, Germany.
    8. Jin Guo, 2015. "Causal relationship between stock returns and real economic growth in the pre- and post-crisis period: evidence from China," Applied Economics, Taylor & Francis Journals, vol. 47(1), pages 12-31, January.
    9. Binswanger, Mathias, 2004. "Stock returns and real activity in the G-7 countries: did the relationship change during the 1980s?," The Quarterly Review of Economics and Finance, Elsevier, vol. 44(2), pages 237-252, May.

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