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Forecasting growth during the Great Recession: is financial volatility the missing ingredient?

Listed author(s):
  • Ferrara, L.
  • Marsilli, C.
  • Ortega, J-P.

The Great Recession endured by the main industrialized countries during the period 2008–2009, in the wake of the financial and banking crisis, has pointed out the major role of the financial sector on macroeconomic fluctuations. In this respect, many researchers have started to reconsider the linkages between financial and macroeconomic areas. In this paper, we evaluate the leading role of the daily volatility of two major financial variables, namely commodity and stock prices, in their ability to anticipate the output growth. For this purpose, we propose an extended MIDAS (Mixed Data Sampling) model that allows the forecasting of the quarterly output growth rate using exogenous variables sampled at various higher frequencies. Empirical results on three industrialized countries (US, France, and UK) show that mixing daily financial volatilities and monthly industrial production is useful at the time of predicting gross domestic product growth over the Great Recession period.

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File URL: https://publications.banque-france.fr/sites/default/files/medias/documents/working-paper_454_2013.pdf
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Paper provided by Banque de France in its series Working papers with number 454.

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Length: 22 pages
Date of creation: 2013
Handle: RePEc:bfr:banfra:454
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Banque de France 31 Rue Croix des Petits Champs LABOLOG - 49-1404 75049 PARIS

Web page: http://www.banque-france.fr/

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