What's good for GM...? Using auto industry stock returns to forecast business cycles and test the Q-theory of investment
We examine the ability of auto industry stock returns to forecast quarterly changes in the growth rates of real GDP, consumption, and investment. We find that auto stock returns are superior to aggregate stock market returns in predicting growth rates of GDP and various forms of consumption. The superior predictive power of auto returns holds for both in-sample and out-of-sample forecasts and has not declined over time. We then apply a finding in this paper---that market returns have no explanatory power for future output or consumption growth when auto returns are included in the regression---to analyze the causal relation between the stock market and investment. We use auto returns to proxy for forecasts of future fundamentals, allowing market returns to capture the effect of the stock market on investment. We find that aggregate returns forecast equipment investment in the presence of auto returns, providing empirical support for q-theory. Results for structures investment are less convincing.
(This abstract was borrowed from another version of this item.)
|Date of creation:||1996|
|Date of revision:|
|Contact details of provider:|| Web page: http://www.dallasfed.org/|
More information through EDIRC
|Order Information:|| Email: |
References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Fischer, Stanley & Merton, Robert C., 1984.
"Macroeconomics and finance: The role of the stock market,"
Carnegie-Rochester Conference Series on Public Policy,
Elsevier, vol. 21(1), pages 57-108, January.
- Stanley Fischer & Robert C. Merton, 1984. "Macroeconomics and Finance: The Role of the Stock Market," NBER Working Papers 1291, National Bureau of Economic Research, Inc.
- James H. Stock & Mark W. Watson, 1993.
"A Procedure for Predicting Recessions with Leading Indicators: Econometric Issues and Recent Experience,"
in: Business Cycles, Indicators and Forecasting, pages 95-156
National Bureau of Economic Research, Inc.
- James H. Stock & Mark W. Watson, 1992. "A Procedure for Predicting Recessions With Leading Indicators: Econometric Issues and Recent Experience," NBER Working Papers 4014, National Bureau of Economic Research, Inc.
- Olivier Blanchard & Changyong Rhee & Lawrence Summers, 1993.
"The Stock Market, Profit, and Investment,"
The Quarterly Journal of Economics,
Oxford University Press, vol. 108(1), pages 115-136.
- Blanchard, O. & Rhee, C. & Summers, L., 1990. "The Stock Market, Profit And Investment," RCER Working Papers 233, University of Rochester - Center for Economic Research (RCER).
- Olivier Blanchard & Changyong Rhee & Lawrence Summers, 1990. "The Stock Market, Profit and Investment," NBER Working Papers 3370, National Bureau of Economic Research, Inc.
- Hall, Robert E, 1978. "Stochastic Implications of the Life Cycle-Permanent Income Hypothesis: Theory and Evidence," Journal of Political Economy, University of Chicago Press, vol. 86(6), pages 971-87, December.
- Barro, Robert J, 1990.
"The Stock Market and Investment,"
Review of Financial Studies,
Society for Financial Studies, vol. 3(1), pages 115-31.
- Mankiw, N. Gregory, 1982. "Hall's consumption hypothesis and durable goods," Journal of Monetary Economics, Elsevier, vol. 10(3), pages 417-425.
- Barry Bosworth, 1975. "The Stock Market and the Economy," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 6(2), pages 527-300.
- Arturo Estrella & Frederic S. Mishkin, 1996.
"Predicting U.S. recessions: financial variables as leading indicators,"
9609, Federal Reserve Bank of New York.
- Arturo Estrella & Frederic S. Mishkin, 1998. "Predicting U.S. Recessions: Financial Variables As Leading Indicators," The Review of Economics and Statistics, MIT Press, vol. 80(1), pages 45-61, February.
- Arturo Estrella & Frederic S. Mishkin, 1995. "Predicting U.S. Recessions: Financial Variables as Leading Indicators," NBER Working Papers 5379, National Bureau of Economic Research, Inc.
- Kydland, Finn E & Prescott, Edward C, 1982.
"Time to Build and Aggregate Fluctuations,"
Econometric Society, vol. 50(6), pages 1345-70, November.
- Finn E. Kydland & Edward C. Prescott, 1982. "Web interface for "Time to Build and Aggregate Fluctuations"," QM&RBC Codes 4a, Quantitative Macroeconomics & Real Business Cycles.
- Finn E. Kydland & Edward C. Prescott, 1982. "Executable program for "Time to Build and Aggregate Fluctuations"," QM&RBC Codes 4, Quantitative Macroeconomics & Real Business Cycles.
- Galeotti, Marzio & Schiantarelli, Fabio, 1994.
"Stock Market Volatility and Investment: Do Only Fundamentals Matter?,"
London School of Economics and Political Science, vol. 61(242), pages 147-65, May.
- Galeotti, Marzio & Schiantarelli, Fabio, 1990. "Stock Market Volatility And Investment: Do Only Fundamental Matter?," Working Papers 90-15, C.V. Starr Center for Applied Economics, New York University.
- Tobin, James, 1969. "A General Equilibrium Approach to Monetary Theory," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 1(1), pages 15-29, February.
- Long, John B, Jr & Plosser, Charles I, 1983. "Real Business Cycles," Journal of Political Economy, University of Chicago Press, vol. 91(1), pages 39-69, February.
- Randall Morck & Andrei Shleifer & Robert W. Vishny, 1990. "The Stock Market and Investment: Is the Market a Sideshow?," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 21(2), pages 157-216.
When requesting a correction, please mention this item's handle: RePEc:fip:feddwp:96-10. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Amy Chapman)
If references are entirely missing, you can add them using this form.