The role of stock markets vs. the term spread in forecasting macrovariables in Finland

Kuosmanen, Petri; Vataja, Juuso

doi:10.1016/j.qref.2011.01.005

Cited by 10 publications

(8 citation statements)

References 18 publications

(46 reference statements)

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“…However, among different financial market variables, the term spread has gained status as the best single financial market indicator for future economic activity (e.g., Estrella, 2005a; Wheelock & Wohar, 2009). The results of Kuosmanen and Vataja (2011) support this conclusion in the Finnish context.…”

Section: Empirical Analysissupporting

confidence: 70%

Forecasting GDP growth with financial market data in Finland: Revisiting stylized facts in a small open economy during the financial crisis

Kuosmanen

Vataja

2013

Rev Financ Econ

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This paper examines the ability of financial variables to predict future economic growth above and beyond past economic activity in a small open economy in the euro area. We aim to clarify potential differences in forecasting economic activity during different economic circumstances. Our results from Finland suggest that the proper choice of forecasting variables is related to general economic conditions. During steady economic growth, the preferred choice for a financial indicator is the short‐term interest rate combined with past values of output growth. However, during economic turbulence, the traditional term spread and stock returns are more important in forecasting GDP growth. The time‐varying predictive content of the financial variables may be utilized by applying regime‐switching nonlinear forecasting models. We propose a novel application using the negative term spread and observed recession as signals to switch between regimes. This procedure yields a significant improvement in forecasting performance at the one‐year forecast horizon.

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Section: Empirical Analysissupporting

confidence: 70%

Forecasting GDP growth with financial market data in Finland: Revisiting stylized facts in a small open economy during the financial crisis

Kuosmanen

Vataja

2013

Rev Financ Econ

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“…As for the relationship between stock return volatility and future economic growth, some papers have reported that stock return volatility has poor marginal predictive ability (see Kuosmanen andVataja 2011 andEspinoza et al 2012). 7 Annaert et al (2001) note that 'the most forward-looking volatility estimate is the implied volatility from options' (p. 8), but they did not test its forecast performance because of the lack of a sufficiently long series.…”

Section: Introductionmentioning

confidence: 99%

“…See Andreou et al (), Annaert et al (), Fornari and Mele () and Chauvet et al (). As for the relationship between stock return volatility and future economic growth, some papers have reported that stock return volatility has poor marginal predictive ability (see Kuosmanen and Vataja and Espinoza et al ).…”

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confidence: 99%

Interest Rate Volatility and Business Cycle Expectations

Martínez-Serna

Navarro

2015

International Finance

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One explanation for the usefulness of financial variables as tools for economic forecasting is that they embody individual and firm expectations of future economic conditions. In this paper, we analyse whether interest rate volatility contains information on agent expectations which are directly measured by confidence indicators. For the sake of robustness, we use several different expectation indicators for the two countries we analyse, the US and Germany. We propose using a forward-looking measure of volatility: the implied volatility of one year cap options. We find that implied volatility adds explanatory power to the yield spread and to changes in the short rate, which are typical predictors of the business cycle, and outperforms realized volatility.

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“…Ibrahim (2010) finds that the predictive role of stock returns for real activity at short horizon is found in the case of Malaysia. Kuosmanen and Vataja (2011) investigate the forecasting content of stock returns and volatility, and the term spread for GDP, private consumption, industrial production and the inflation rate in Finland. Their results suggest that during normal times, the term spread is a much better tool than stock market variables for predicting real activity.…”

Section: Introductionmentioning

confidence: 99%

The Predictive Role of Stock Market Return for Real Activity in Thailand

Jiranyakul

2012

SSRN Journal

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Stock market return is one of financial variables that contain information to forecast real activity such as industrial production and real GDP growth. However, it is still controversial that stock market return can have a predictive content on real activity. This paper attempts to investigate the ability of stock market return to predict industrial production growth (or real activity) in Thailand, which is an emerging market economy. The standard causality test and the equal forecast evaluation of nested models are employed. For the purpose of forecasting, the data are divided into two periods: the data for the in-sample and the out-of-sample periods. The test of equal forecasting ability is also used. Using monthly data from January 1993 to December 2011, it is found that the model augmented with stock return variable outperforms the benchmark model in the forecast horizon of two months. The results seem to support the notion that stock market return is a predictor of industrial output growth in the short run. Moreover, the standard Granger causality test using the in-sample data also supports this notion. The findings offers a useful insight to investors, financial managers and policymakers on the role of stock market return in forecasting real economic activity. Specifically, a change in stock market return is a signal for revising investment decision by investors and portfolio managers.JEL Classification: E44, C14, C22

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The role of stock markets vs. the term spread in forecasting macrovariables in Finland

Cited by 10 publications

References 18 publications

Forecasting GDP growth with financial market data in Finland: Revisiting stylized facts in a small open economy during the financial crisis

Forecasting GDP growth with financial market data in Finland: Revisiting stylized facts in a small open economy during the financial crisis

Interest Rate Volatility and Business Cycle Expectations

The Predictive Role of Stock Market Return for Real Activity in Thailand

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