Financial variables as predictors of real output growth

• Main Author: Tay, Anthony S.
• Format: text
• Language: English
• Published: Institutional Knowledge at Singapore Management University 2007
• Subjects: Forecasting; Mixed Frequencies; Functional linear regression.; Econometrics
• Online Access: https://ink.library.smu.edu.sg/soe_research/1058; https://ink.library.smu.edu.sg/context/soe_research/article/2057/viewcontent/Tay_2007_.pdf
• Institution: Singapore Management University

We investigate two methods for using daily stock returns to forecast, and update forecasts of, quarterly real output growth. Both methods aggregate daily returns in some manner to form a single stock market variable. We consider (i) augmenting the quarterly AR(1) model for real output growth with daily returns using a nonparametric Mixed Data Sampling (MIDAS) setting, and (ii) augmenting the quarterly AR(1) model with the most recent r -day returns as an additional predictor. We discover that adding low frequency stock returns (up to annual returns, depending on forecast horizon) to a quarterly AR(1) model improves forecasts of output growth