Abstract
PurposeFinancial market holds superior information that can give insights into the future trajectory of economic growth. Further, identifying sectors that hold the key to future economic growth is important for all economies, but particularly relevant to emerging markets. However, unlike existing studies, the paper provides new insights into the forward-oriented nexus between financial markets and economic growth.Design/methodology/approachThis paper takes a forward-looking approach of using financial market information to predict future economic growth. The authors use ARDL modeling approach to predict economic growth using the information from stock market sectoral returns.FindingsThe authors find that sectoral stock returns significantly improve economic growth forecasts. However, the forecasting superiority is not uniform across sectors and horizons. Auto, consumers' spending, materials and realty sectors provide the most forecasting gains. In contrast, banking, capital goods and industrial sectors provide superior forecasts, but only at horizons beyond one year. The authors also find that the forecast superiority of sectors at longer horizons is inversely related to volatility.Research limitations/implicationsResearch highlights the need for sector-focused policy actions in driving economic growth. Further, the findings of the paper identify sectors that drive short-, medium- and long-term economic growth.Practical implicationsThere is a significant heterogeneity among different sectors and across horizons in predicting economic growth. Results suggest that targeted policy actions in sectors like materials, metals, oil and gas, and realty are key in driving economic growth. Further, policies geared toward the grassroots industries are at least as beneficial as the large-scale industries. Evidence also suggests the need for an active fiscal policy to address infrastructural bottlenecks in primary industries like basic materials and energy. Evidence nevertheless does not undermine the role of monetary policy actions.Originality/valueUnlike any paper till date, the innovation of the paper is that it takes an ARDL modeling approach to measure stock market sectoral returns' ability to forecast economic growth several months ahead in the future. Though the paper considers the Indian case, the innovation and contribution extents to the entire field of economic studies.
Subject
General Economics, Econometrics and Finance
Reference58 articles.
1. Stock returns and volatility: pricing the short-run and long-run components of market risk;The Journal of Finance,2008
2. Aggregate economic variables and stock markets in India;International Research Journal of Finance and Economics,2008
3. Persistence in forecasting performance and conditional combination strategies;Journal of Econometrics,2006
4. Make in India; Which Exports Can Drive the Next Wave of Growth?,2015
5. Andersson, M. and D'Agostino, A. (2008), “Are sectoral stock prices useful for predicting euro area GDP?”, Technical Report.
Cited by
1 articles.
订阅此论文施引文献
订阅此论文施引文献,注册后可以免费订阅5篇论文的施引文献,订阅后可以查看论文全部施引文献