Do Stock Market Returns Predict Changes to Output? Evidence from a Nonlinear Panel Data Model

Ólan Henry, Nilss Olekalns () and Jonathan Thong

No 868, Department of Economics - Working Papers Series from The University of Melbourne

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.

Keywords: Panel data; current depth of recession; stock returns (search for similar items in EconPapers)
JEL-codes: E32 (search for similar items in EconPapers)
Pages: 25 pages
Date: 2003
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Citations: View citations in EconPapers (2)

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Journal Article: Do stock market returns predict changes to output? Evidence from a nonlinear panel data model (2004)
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