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Predictability of Growth in Emerging Markets: Information in Financial Aggregates

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Abstract

This paper tests for predictability of output growth in a panel of 22 emerging market economies. We use pooled panel data methods that control for endogeneity and persistence in the predictor variables to test the predictive power of a large set of financial aggregates. Results show that stock returns, the term spread, default spreads and portfolio investment flows help predict output growth in emerging markets. We also find evidence that suggests that global aggregates such as the performance of commodity markets, a cross-sectional firm size factor, and returns on the market portfolio contain information about the future state of the economy. We benchmark our results against those from the U.S. and find that there are differences in the ability of financial markets in predicting economic growth. Our results generalize to emerging markets previous findings in the empirical macro-finance literature on the linkages between financial market performance and the real economy.

Suggested Citation

  • Ayelen Banegas, 2016. "Predictability of Growth in Emerging Markets: Information in Financial Aggregates," International Finance Discussion Papers 1174, Board of Governors of the Federal Reserve System (U.S.).
    • Handle: RePEc:fip:fedgif:1174
    DOI: 10.17016/IFDP.2016.1174
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    More about this item

    Keywords

    Output growth predictability; Emerging markets; Leading indicators; Financial variables;
    All these keywords.

    JEL classification:

    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

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