Title: Predicting output growth at long horizons: stock return volatility and the monetary policy influence
Authors: Christos Bouras; Christina Christou; Christis Hassapis
Addresses: Department of Banking and Financial Management, University of Piraeus, Greece ' Department of Banking and Financial Management, University of Piraeus, Greece ' Department of Economics, University of Cyprus, Nicosia, Cyprus
Abstract: In this paper, we investigate the presence of multiple horizon causation from stock return volatility to the growth rates of industrial production in terms of a causal chain system, where monetary policy instruments and inflation operate as auxiliary processes. Multiple horizon non-causality is tested by implementing the test procedure proposed by Dufour et al. (2006) on data from four economies, namely USA, Germany, Japan and Italy. Our results reveal a large number of highly significant direct and indirect causality links of significant size running from stock return volatility to output growth at both short- and long-horizons in all four economies. A pseudo out-of-sample forecasting evaluation also shows how conditioning on such information yields better output growth predictions at different forecast periods.
Keywords: indirect causality; h step-ahead causality; stock returns volatility; output growth; monetary policy; causality chain; causality measures; growth prediction; long horizons; USA; United States; Germany; Japan; Italy.
International Journal of Portfolio Analysis and Management, 2015 Vol.2 No.1, pp.57 - 98
Received: 20 Oct 2015
Accepted: 30 Oct 2015
Published online: 21 Jun 2016 *