Do Stock Prices Contain Predictive Power for the Future Economic Activity? A Granger Causality Analysis in the Frequency Domain

19 Pages Posted: 3 Dec 2011

See all articles by Christophe Croux

Christophe Croux

KU Leuven - Faculty of Business and Economics (FEB)

Peter Reusens

KU Leuven - Faculty of Economics and Business

Date Written: July 13, 2011

Abstract

This paper investigates the predictive power for future domestic economic activity included in domestic stock prices, using a Granger causality analysis in the frequency domain. We are able to evaluate whether the predictive power is concentrated at the slowly fluctuating components or at the quickly fluctuating components. Using quarterly data for the G-7 countries, we found that the slowly fluctuating components of the stock prices have large predictive power for the future GDP, while this is not the case for the quickly fluctuating components. This finding holds both in a single-country setting and in a multi-country setting. Therefore, macro-economic policy makers could use the slowly fluctuating components of the stock prices to improve their predictions of the future GDP.

Keywords: frequency domain, granger causality, gross domestic product, predictive power, stock prices

Suggested Citation

Croux, Christophe and Reusens, Peter, Do Stock Prices Contain Predictive Power for the Future Economic Activity? A Granger Causality Analysis in the Frequency Domain (July 13, 2011). Available at SSRN: https://ssrn.com/abstract=1967024 or http://dx.doi.org/10.2139/ssrn.1967024

Christophe Croux (Contact Author)

KU Leuven - Faculty of Business and Economics (FEB) ( email )

Naamsestraat 69
Leuven, B-3000
Belgium

Peter Reusens

KU Leuven - Faculty of Economics and Business ( email )

Naamsestraat 69
Leuven, B-3000
Belgium

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