Do stock market returns predict changes to output? Evidence from a nonlinear panel data model

Ólan Henry, Nilss Olekalns () and Jonathan Thong

Empirical Economics, 2004, vol. 29, issue 3, 527-540

Abstract: Recent empirical work suggests a predictive relationship between stock returns and output growth. We employ quarterly data from a panel of 27 countries to test whether stock returns as useful in predicting growth. Unlike previous research, our approach allows for the possible non-linear effect of recessions on the growth-return relationship. There is strong evidence to suggest that a linear model would be misspecified and provide potentially misleading inference. Using a switching regression approach, we find evidence that returns are most useful in predicting growth when the economy is in recession. Copyright Springer-Verlag 2004

Keywords: Panel data; current depth of recession; stock returns; E32 (search for similar items in EconPapers)
Date: 2004
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DOI: 10.1007/s00181-003-0182-4

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