The News in Financial Asset Returns
File(s)
Published version
Author(s)
Robotti, C
Dwyer, GP
Type
Journal Article
Abstract
The notion that financial asset returns are predictors of future economic activity is widespread, but detailed analyses provide little support for financial markets' ability to reveal future economic activity. Even though the evidence on various indicators used by different researchers is mixed, the authors of this article explore the notion that financial markets reveal useful information about future economic activity.
This article examines and answers two questions: First, what is a good way of extracting information about future economic activity from asset prices? Second, do financial asset returns help predict economic activity over horizons from one month to five years?
To determine whether news of an asset's excess return can reveal information about unexpected economic activity, the authors construct a method of extracting the news about future economic activity from returns on financial assets. The authors use linear regressions to relate the unexpected parts of economic activity and the asset's return to actual economic activity and the actual return on an asset.
The evidence in the article shows that movements in financial markets do presage developments in the economy. The authors find that movements in the overall stock market and bond returns are the most important financial indicators. It remains to be seen whether those indicators hold up to variations in technique or the passage of time.
This article examines and answers two questions: First, what is a good way of extracting information about future economic activity from asset prices? Second, do financial asset returns help predict economic activity over horizons from one month to five years?
To determine whether news of an asset's excess return can reveal information about unexpected economic activity, the authors construct a method of extracting the news about future economic activity from returns on financial assets. The authors use linear regressions to relate the unexpected parts of economic activity and the asset's return to actual economic activity and the actual return on an asset.
The evidence in the article shows that movements in financial markets do presage developments in the economy. The authors find that movements in the overall stock market and bond returns are the most important financial indicators. It remains to be seen whether those indicators hold up to variations in technique or the passage of time.
Date Issued
2004-03-31
Date Acceptance
2004-03-31
Citation
Economic Review: Federal Reserve Bank of Atlanta, 2004, 89 (1), pp.1-23
ISSN
0732-1813
Publisher
Federal Reserve Bank of Atlanta
Start Page
1
End Page
23
Journal / Book Title
Economic Review: Federal Reserve Bank of Atlanta
Volume
89
Issue
1
Copyright Statement
© 2004 The Authors
Publication Status
Published