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Market implied GDP

Author

Listed:
  • Harris Ntantanis

    (NP Investment Research)

  • Lawrence Pohlman

    (University of Massachusetts-Boston)

Abstract

GDP is the most important and widely studied macroeconomic variable. It indicates the state of an economy and is used as a measure of the economic strength of a country. Due to its comprehensive nature, calculating GDP takes a great deal of work and is often revised over time. This has led to the common practice of forecasting GDP using econometric models. This paper introduces a new method for estimating GDP using a unique data set of options whose values are determined by the levels of GDP and the GDP growth rate. The option is market priced which makes it distinct since it is available daily, subject to no revisions and aggregates the market’s opinion about GDP. These option implied values for GDP and GDP growth rate are similar to the concept of implied volatilities. We show that this option improves the GDP growth rate forecasts by 21% compared to conventional econometric models.

Suggested Citation

  • Harris Ntantanis & Lawrence Pohlman, 2020. "Market implied GDP," Journal of Asset Management, Palgrave Macmillan, vol. 21(7), pages 636-646, December.
    • Handle: RePEc:pal:assmgt:v:21:y:2020:i:7:d:10.1057_s41260-020-00176-z
    DOI: 10.1057/s41260-020-00176-z
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    References listed on IDEAS

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    More about this item

    Keywords

    GDP; GDP-linked securities; Implied GDP; Forecasting GDP; Nowcasting; Bivariate probability distribution; Option pricing;
    All these keywords.

    JEL classification:

    • C12 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Hypothesis Testing: General
    • C13 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Estimation: General
    • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes
    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • C43 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods: Special Topics - - - Index Numbers and Aggregation
    • C53 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Forecasting and Prediction Models; Simulation Methods
    • E17 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - Forecasting and Simulation: Models and Applications
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • F30 - International Economics - - International Finance - - - General
    • F34 - International Economics - - International Finance - - - International Lending and Debt Problems
    • G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
    • G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation
    • H12 - Public Economics - - Structure and Scope of Government - - - Crisis Management
    • H63 - Public Economics - - National Budget, Deficit, and Debt - - - Debt; Debt Management; Sovereign Debt

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