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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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Listed author(s):
  • 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 Defense, EconomiX in its series EconomiX Working Papers with number 2012-19.

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Length: 8 pages
Date of creation: 2012
Handle: RePEc:drm:wpaper:2012-19
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Web page: https://economix.fr/
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Keywords: Great Recession; Forecasting; Financial variables; MIDAS approach;

Other versions of this item:

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. 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.
  2. Hamilton, James D., 2003. "What is an oil shock?," Journal of Econometrics, Elsevier, vol. 113(2), pages 363-398, April.
  3. Marcellino, Massimiliano & Schumacher, Christian, 2007. "Factor-MIDAS for now- and forecasting with ragged-edge data: a model comparison for German GDP," Discussion Paper Series 1: Economic Studies 2007,34, Deutsche Bundesbank, Research Centre.
  4. Lutz Kilian, 2008. "The Economic Effects of Energy Price Shocks," Journal of Economic Literature, American Economic Association, vol. 46(4), pages 871-909, December.
  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. Rudebusch, Glenn D. & Williams, John C., 2009. "Forecasting Recessions: The Puzzle of the Enduring Power of the Yield Curve," Journal of Business & Economic Statistics, American Statistical Association, vol. 27(4), pages 492-503.
  7. 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.
  8. 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.
  9. Duarte, Agustin & Venetis, Ioannis A. & Paya, Ivan, 2005. "Predicting real growth and the probability of recession in the Euro area using the yield spread," International Journal of Forecasting, Elsevier, vol. 21(2), pages 261-277.
  10. Bellégo, C. & Ferrara, L., 2009. "Forecasting Euro-area recessions using time-varying binary response models for financial," Working papers 259, Banque de France.
  11. Laurent Ferrara, 2007. "Point and interval nowcasts of the Euro area IPI," Applied Economics Letters, Taylor & Francis Journals, vol. 14(2), pages 115-120.
  12. 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.
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Cited by:

  1. Ferrara, Laurent & Marsilli, Clément & Ortega, Juan-Pablo, 2014. "Forecasting growth during the Great Recession: is financial volatility the missing ingredient?," Economic Modelling, Elsevier, vol. 36(C), pages 44-50.
  2. Athanassios Petralias & Sotirios Petros & Pródromos Prodromídis, 2013. "Greece in Recession: Economic predictions, mispredictions and policy implications," GreeSE – Hellenic Observatory Papers on Greece and Southeast Europe 75, Hellenic Observatory, LSE.
  3. L. Ferrara & C. Marsilli, 2014. "Nowcasting global economic growth: A factor-augmented mixed-frequency approach," Working papers 515, Banque de France.
  4. C. Marsilli, 2014. "Variable Selection in Predictive MIDAS Models," Working papers 520, Banque de France.
  5. 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.

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