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Financial variables as leading indicators of GDP growth: Evidence from a MIDAS approach during the Great Recession

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  • Laurent Ferrara
  • Clément Marsilli

Abstract

The global economic recession, referred to as the Great Recession, endured by the main industrialized countries during the period 2008-09, in the wake of the financial and banking crisis, has pointed out the current importance of the financial sector in macroeconomics. In this paper, we evaluate the predictive power of some major financial variables to anticipate GDP growth in euro area countries during this specific period of time. In this respect, we implement a MIDAS-based modeling approach, put forward by Ghysels et al. (2007), that enables to forecast quarterly GDP growth rates using exogenous variables sampled at higher frequencies. Empirical results show that, overall, stock prices help to improve the accuracy of GDP forecasts by comparison with a standard opinion survey variable, while oil prices and term spread appear to be less informative.

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File URL: http://economix.fr/pdf/dt/2012/WP_EcoX_2012-19.pdf
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Paper provided by University of Paris West - Nanterre la Défense, EconomiX in its series EconomiX Working Papers with number 2012-19.

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Length: 8 pages
Date of creation: 2012
Date of revision:
Handle: RePEc:drm:wpaper:2012-19
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Keywords: Great Recession; Forecasting; Financial variables; MIDAS approach;

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Find related papers by JEL classification:
  • C2 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables
  • C5 - Mathematical and Quantitative Methods - - Econometric Modeling
  • E3 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles

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  1. Laurent Ferrara, 2007. "Point and interval nowcasts of the Euro area IPI," Applied Economics Letters, Taylor & Francis Journals, vol. 14(2), pages 115-120.
  2. Marcellino, Massimiliano & Schumacher, Christian, 2008. "Factor-MIDAS for now- and forecasting with ragged-edge data: A model comparison for German GDP," CEPR Discussion Papers 6708, C.E.P.R. Discussion Papers.
  3. Bellégo, C. & Ferrara, L., 2009. "Forecasting Euro-area recessions using time-varying binary response models for financial," Working papers 259, Banque de France.
  4. Glenn D. Rudebusch & John C. Williams, 2007. "Forecasting recessions: the puzzle of the enduring power of the yield curve," Working Paper Series 2007-16, Federal Reserve Bank of San Francisco.
  5. Farmer, Roger E.A., 2012. "The stock market crash of 2008 caused the Great Recession: Theory and evidence," Journal of Economic Dynamics and Control, Elsevier, vol. 36(5), pages 693-707.
  6. Ivan Paya & Agustín Duarte & Ioannis A. Venetis, 2004. "Predicting Real Growth And The Probability Of Recession In The Euro Area Using The Yield Spread," Working Papers. Serie AD 2004-31, Instituto Valenciano de Investigaciones Económicas, S.A. (Ivie).
  7. Eric Ghysels & Arthur Sinko & Rossen Valkanov, 2007. "MIDAS Regressions: Further Results and New Directions," Econometric Reviews, Taylor & Francis Journals, vol. 26(1), pages 53-90.
  8. Annabelle Mourougane & Moreno Roma, 2003. "Can confidence indicators be useful to predict short term real GDP growth?," Applied Economics Letters, Taylor & Francis Journals, vol. 10(8), pages 519-522.
  9. 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.
  10. Kilian, Lutz, 2007. "The Economic Effects of Energy Price Shocks," CEPR Discussion Papers 6559, C.E.P.R. Discussion Papers.
  11. Clements, Michael P & Galvão, Ana Beatriz, 2008. "Macroeconomic Forecasting With Mixed-Frequency Data," Journal of Business & Economic Statistics, American Statistical Association, vol. 26, pages 546-554.
  12. James D. Hamilton, 2000. "What is an Oil Shock?," NBER Working Papers 7755, National Bureau of Economic Research, Inc.
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Cited by:

  1. Ferrara, L. & Marsilli, C. & Ortega, J-P., 2013. "Forecasting growth during the Great Recession: is financial volatility the missing ingredient?," Working papers 454, Banque de France.
  2. Athanassios Petralias & Sotirios Petros & Pródromos Prodromídis, 2013. "Greece in recession: economic predictions, mispredictions and policy implications," LSE Research Online Documents on Economics 52626, London School of Economics and Political Science, LSE Library.
  3. C. Marsilli, 2014. "Variable Selection in Predictive MIDAS Models," Working papers 520, Banque de France.

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