Predicting the Bear Stock Market: Macroeconomic Variables as Leading Indicators
Posted: 16 Mar 2008
Date Written: March 2008
This paper investigates whether macroeconomic variables can predict recessions in the stock market (Bear Stock Markets). Series such as interest rate spreads, inflation rates, money stocks, aggregate output, and unemployment rates are evaluated individually. After using a Markov-switching model to identify the recession periods in the stock market, we consider both in-sample and out-of-sample tests of predictive ability. Empirical evidence from monthly data on the Standard & Poor's S&P 500 price index suggests that among the macroeconomic variables that are considered, yield curve spreads and inflation rates are the most useful predictors of recessions in the U.S. stock market according to in-sample and out-of-sample forecasting performance. Moreover, compared with predicting stock returns, it is easier to predict bear stock markets using macroeconomic variables.
Keywords: Macroeconomic variables, Stock returns, Bear Stock Markets
JEL Classification: G10, C53
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