Do stock market trading activities forecast recessions?

Chatterjee, Ujjal

doi:10.1016/j.econmod.2016.08.007

Cited by 8 publications

(5 citation statements)

References 31 publications

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“…Employing a Markov switching model and a nonlinear multivariate dynamic factor model, Chauvet and Senyuz () show that including information extracted from the level and curvature of the yield curve with the standard slope provided substantial incremental predictive value for the phases of the US business cycle. Chatterjee () investigates three distinct aspects of stock market trading activities, namely stock market liquidity, returns and volatility as predictors of US recessions. Results based on probit models show that stock market liquidity and forecasts recessions up to three and two quarters ahead respectively, whilst stock market volatility has no forecasting power.…”

Section: Literature Reviewmentioning

confidence: 99%

Forecasting the Probability of Recessions in South Africa: the Role of Decomposed Term Spread and Economic Policy Uncertainty

Aye

Christou

Gil-Alana

et al. 2018

J of Intl Development

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This paper decomposes the term spread into the expectation and the term premium components using a fractional integration approach and subsequently uses same with the economic policy uncertainty index to forecast the probability of recession in South Africa. We use different specifications of the probit model and quarterly data from 1990:1 to 2012:1. Our out-of-sample results show that the model that incorporates the expectation component and economic policy uncertainty provides the best forecast of recession. All three recession periods in our sample were accurately dictated by the prediction models and the best forecast occurred at the four quarters ahead horizon. A robustness check with a longer sample from 1946q1 to 2017q4 but excluding the factors and economic policy uncertainty due to data limitation provided justification for decomposing the term spread as the model with the expected spread turned out to be the best. We draw the implications of these findings.

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Section: Literature Reviewmentioning

confidence: 99%

Forecasting the Probability of Recessions in South Africa: the Role of Decomposed Term Spread and Economic Policy Uncertainty

Aye

Christou

Gil-Alana

et al. 2018

J of Intl Development

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“…In this paper, the NARDL model helps us to investigate the relationship between the treasury yield spread and EPU in Japan and try to draw the short-and long-run asymmetric reactions of the yield spread through positive and negative partial sum decompositions of changes in EPU. Furthermore, some academic research [21,22] has provided evidence that the stock market can forecast recessions, so we speculate whether taking bond and stock markets into consideration simultaneously may describe the full picture of Japanese financial markets.…”

Section: Introductionmentioning

confidence: 99%

Yield Spread and Economic Policy Uncertainty: Evidence from Japan

et al. 2020

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In this paper, we adopt the nonlinear autoregressive distributed lags (NARDL) model extended by Shin et al. (2014) to investigate the relationship between the treasury yield spread and economic policy uncertainty (EPU) in Japan. This model helps us to explore the short- and long-run asymmetric reactions of explained variables through positive and negative partial sum decompositions of changes in the explanatory variable(s). In our research, the testing of the NARDL specification reveals the existence of a significant long-run asymmetric equilibrium between the yield spread and EPU in Japan. On the other hand, we find a significant positive nexus between the treasury yield spread and EPU reduction in the long run. We speculate that because of low inflation, a poor economic outlook and the low interest rate environment since 1990, financial agents are markedly sensitive to negative shocks resulting from EPU. This means that when facing a good economy, bond agents are quick to sell, especially with higher-risk long-term interest rate bonds. Meanwhile, because the Bank of Japan announced the Stock Purchasing Plan in October 2002 and from the point view of portfolio management, while the influence of a positive economic outlook dominates the negative outlook, flight from quality has no role in asset portfolio adjustment. The empirical implications are that the long history of unconventional monetary policy supports the demand for both bonds and stock markets. When taking the stock market into consideration, the correlations between the yield spread, EPU and stock market capture the full wealth effects of the low interest rate environment in Japan.

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“…Concomitantly, the economic outlook can be envisaged by attending to the behaviour of the stock markets. An economic despair is often likely to succeed a sharp collapse of stock prices while a surge in them can be interpreted as a positive sign for economic growth and development (for instance see, Airaudo, Nistico, & Zanna, 2015; Apergis, Artikis, & Kyriazis, 2015; Batten & Szilagyi, 2011; Batten & Vo, 2015; Chatterjee, 2016; Funke, Paetz, & Pytlarczyk, 2010; Nasir et al, 2015). 2 Consequently, due to the prima facie macro‐financial inter‐linkages, one shall be beware of the factors which may influence the stock market, particularly when the global financial system in general, and developing economies in particular, have become more integrated and complicated (Batten, Morgan, & Szilagyi, 2015; Morana & Beltratti, 2008).…”

Section: Introductionmentioning

confidence: 99%

Development of Vietnamese stock market: Influence of domestic macroeconomic environment and regional markets

et al. 2020

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This study has analysed the role of the domestic economic environment and regional markets (Thailand, Japan, Hong Kong and China) in explaining the dynamics of Vietnamese stock market. In so doing, we employed a time‐varying structural vector autoregression framework which accounts for time variations (in coefficients as well as in the variance–covariance matrix of innovations) on the data from July 2000 to December 2016. Our key findings suggested that the easing of monetary and credit conditions, stable and stronger currency and economic growth have played a significant and positive role in the development of the stock market in Vietnam. Inflation shocks did have a negative impact which implied that in policy setting the price stability is very important for the financial stability in Vietnam. The Vietnamese stock market is also heavily influenced by the regional markets, as there is strong evidence of co‐movement. However, it was also witnessed that despite having a similar direction of impact and co‐movement, different markets have an influence of different degrees and intensity on the Vietnamese stock market. Lastly, we also witnessed that as compared to the Global Financial Crisis, the recent periods showed comparatively lesser responsiveness. This could be associated with the intensive reaction during the period of financial turmoil as well as with an increase in the stability of the Vietnamese stock market as it matures.

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Do stock market trading activities forecast recessions?

Cited by 8 publications

References 31 publications

Forecasting the Probability of Recessions in South Africa: the Role of Decomposed Term Spread and Economic Policy Uncertainty

Forecasting the Probability of Recessions in South Africa: the Role of Decomposed Term Spread and Economic Policy Uncertainty

Yield Spread and Economic Policy Uncertainty: Evidence from Japan

Development of Vietnamese stock market: Influence of domestic macroeconomic environment and regional markets

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