Nowcasting business cycle turning points with stock networks and machine learning

Andres Azqueta-Gavaldon, Dominik Hirschbühl, Luca Onorante and Lorena Saiz

No 2494, Working Paper Series from European Central Bank

Abstract: We propose a granular framework that makes use of advanced statistical methods to approximate developments in economy-wide expected corporate earnings. In particular, we evaluate the dynamic network structure of stock returns in the United States as a proxy for the transmission of shocks through the economy and identify node positions (firms) whose connectedness provides a signal for economic growth. The nowcasting exercise, with both the in-sample and the out-of-sample consistent feature selection, highlights which firms are contemporaneously exposed to aggregate downturns and provides a more complete narrative than is usually provided by more aggregate data. The two-state model for predicting periods of negative growth can remarkably well predict future states by using information derived from the node-positions of manufacturing, transportation and financial (particularly insurance) firms. The three-states model, which identifies high, low and negative growth, successfully predicts economic regimes by making use of information from the financial, insurance, and retail sectors. JEL Classification: C45, C51, D85, E32, N1

Keywords: early warning signal; Granger-causality networks; real-time; turning point prediction (search for similar items in EconPapers)
Date: 2020-11
New Economics Papers: this item is included in nep-big, nep-cmp, nep-fdg and nep-net
Note: 2460732
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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