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Do stock market trading activities forecast recessions?

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  • Chatterjee, Ujjal K.

Abstract

This paper re-examines the existing recession forecasting models with stock market liquidity as an additional forecasting variable. We investigate three distinct aspects of stock market trading activities, namely stock market liquidity, returns and volatility as predictors of U.S. recessions. We also conduct a horserace comparison in the recession forecasting power between various stock market liquidity measures. We show that i) lower stock market liquidity signals recessions; ii) stock market liquidity (returns) forecasts recessions up to three quarters (two quarters) into the future, while stock market volatility has no forecasting power; iii) stock market liquidity as computed by stock transaction costs and by stock price changes to trading volume forecast recessions better than other measures in the literature; iv) stock market liquidity-based models outperform the survey of professional forecasters' estimates of recession probabilities, and hence the results suggest that professional forecasters may need to incorporate stock market liquidity in their forecasts. The results have potential preemptive monetary policy implications.

Suggested Citation

  • Chatterjee, Ujjal K., 2016. "Do stock market trading activities forecast recessions?," Economic Modelling, Elsevier, vol. 59(C), pages 370-386.
    • Handle: RePEc:eee:ecmode:v:59:y:2016:i:c:p:370-386
    DOI: 10.1016/j.econmod.2016.08.007
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    Cited by:

    1. Mei-Chih Wang & Pao-Lan Kuo & Chan-Sheng Chen & Chien-Liang Chiu & Tsangyao Chang, 2020. "Yield Spread and Economic Policy Uncertainty: Evidence from Japan," Sustainability, MDPI, vol. 12(10), pages 1-14, May.
    2. Muhammad Ali Nasir & Muhammad Shahbaz & Trinh Thi Mai & Moade Shubita, 2021. "Development of Vietnamese stock market: Influence of domestic macroeconomic environment and regional markets," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 26(1), pages 1435-1458, January.
    3. Goodness C. Aye & Christina Christou & Luis A. Gil‐Alana & Rangan Gupta, 2019. "Forecasting the Probability of Recessions in South Africa: the Role of Decomposed Term Spread and Economic Policy Uncertainty," Journal of International Development, John Wiley & Sons, Ltd., vol. 31(1), pages 101-116, January.
    4. Chatterjee, Ujjal K. & Zirgulis, Aras & Hüttinger, Maik & French, Joseph J., 2024. "Reassessing the inversion of the Treasury yield curve as a sign of U.S. recessions: Insights from the housing and credit markets," The North American Journal of Economics and Finance, Elsevier, vol. 73(C).
    5. Mohammadi, H. & Abolhasani, L. & Shahnoushi, N. & Shabanian, F., 2018. "The effects of business cycle indicators on stock market indices of food industry in Iran," 2018 Conference, July 28-August 2, 2018, Vancouver, British Columbia 277425, International Association of Agricultural Economists.
    6. Chatterjee, Ujjal Kanti & Bazzana, Flavio, 2024. "Do corporate credit spreads predict the real economy?," International Review of Economics & Finance, Elsevier, vol. 91(C), pages 272-286.

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    More about this item

    Keywords

    Yield curve; Stock market liquidity; Monetary policy; Probit model; Recessions; Forecasting;
    All these keywords.

    JEL classification:

    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
    • G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • E47 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Forecasting and Simulation: Models and Applications

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