Predicting the Bear Stock Market: Macroeconomic Variables as Leading Indicators

Posted: 16 Mar 2008

See all articles by Shiu‐Sheng Chen

Shiu‐Sheng Chen

Department of Economics, National Taiwan University

Date Written: March 2008

Abstract

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

Suggested Citation

Chen, Shiu-Sheng, Predicting the Bear Stock Market: Macroeconomic Variables as Leading Indicators (March 2008). Available at SSRN: https://ssrn.com/abstract=1106100

Shiu-Sheng Chen (Contact Author)

Department of Economics, National Taiwan University ( email )

No. 1, Sec. 4, Roosevelt Road
Taipei, 10617
Taiwan

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