Coincident and Leading Indicators of the Stock Market

35 Pages Posted: 11 Aug 2000

See all articles by Marcelle Chauvet

Marcelle Chauvet

University of California Riverside

Simon Potter

Federal Reserve Bank of New York

Date Written: October 1999

Abstract

In this paper we have two goals: first, we want to represent monthly stock market fluctuations by constructing a nonlinear coincident financial indicator. The indicator is constructed as an unobservable factor whose first moment and conditional volatility are driven by a two state Markov variable. It can be interpreted as the investors' real time belief about the state of financial conditions. Second, we want to explore an approach in which investors may use their perceptions of the state of the economy to form forecasts of financial market conditions and possibly of excess returns. To investigate this, we build leading indicators as forecasts of the estimated coincident financial index. The leading indicators yield better within and out-of-sample performance in forecasting, not only the state of the stock market but also of excess stock returns, as compared with the performance obtained using linear methods that have been proposed in the existing literature.

JEL Classification: E44, G12

Suggested Citation

Chauvet, Marcelle and Potter, Simon, Coincident and Leading Indicators of the Stock Market (October 1999). Available at SSRN: https://ssrn.com/abstract=218008 or http://dx.doi.org/10.2139/ssrn.218008

Marcelle Chauvet (Contact Author)

University of California Riverside ( email )

900 University Avenue
4136 Sproul Hall
Riverside, CA 92521
United States
(951) 827-1587 (Phone)

HOME PAGE: http://https://sites.google.com/site/marcellechauvet/

Simon Potter

Federal Reserve Bank of New York ( email )

33 Liberty Street
New York, NY 10045
United States
212-720-6309 (Phone)
212-720-1844 (Fax)

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