What's Good for GM...? Using Auto Industry Stock Returns to Forecast Business Cycles and Test the Q-Theory of Investment

Board of Governors of the Federal Reserve System Finance and Econ. Disc. Series 96-38

32 Pages Posted: 30 Oct 1996

Date Written: August 1996

Abstract

We examine the ability of auto industry stock returns to forecast quarterly changes in the growth rates of real GDP, consumption, and investment. We find that auto stock returns are superior to aggregate stock market returns in predicting growth rates of GDP and various forms of consumption. The superior predictive power of auto returns holds for both in-sample and out-of-sample forecasts and has not declined over time. We then apply a finding in this paper that market returns have no explanatory power for future output or consumption growth when auto returns are included in the regression to analyze the causal relation between the stock market and investment. We use auto returns to proxy for forecasts of future fundamentals, allowing market returns to capture the effect of the stock market on investment. We find that aggregate returns forecast equipment investment in the presence of auto returns, providing empirical support for q-theory. Results for structures investment are less convincing.

JEL Classification: E21, E22, E32, E44, E47, L92

Suggested Citation

Duffee, Gregory R. and Prowse, Stephen D., What's Good for GM...? Using Auto Industry Stock Returns to Forecast Business Cycles and Test the Q-Theory of Investment (August 1996). Board of Governors of the Federal Reserve System Finance and Econ. Disc. Series 96-38, Available at SSRN: https://ssrn.com/abstract=51880 or http://dx.doi.org/10.2139/ssrn.51880

Gregory R. Duffee (Contact Author)

Johns Hopkins ( email )

3400 Charles Street
Baltimore, MD 21218-2685
United States

Stephen D. Prowse

affiliation not provided to SSRN

No Address Available

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