Financial variables and the out-of-sample forecastability of the growth rate of Indian industrial production
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Date
Authors
Gupta, Rangan
Ye, Yuxiang
Sako, Christopher M.
Journal Title
Journal ISSN
Volume Title
Publisher
Taylor & Francis
Abstract
In this paper, we consider the forecasting power, both in- and out-of-sample, of 11 financial
variables with respect to the growth rate of Indian industrial production over the monthly out-ofsample
period of 2005:4–2011:4, using an in-sample of 1994:1–2005:3. The financial variables used
are: M0, M1, M2, M3, lending rate, 3-month Treasury bill rate, term spread, real effective exchange
rate, real stock prices, dividend yield and non-food credit growth. We observe that that, at times,
in-sample and out-of-sample predictive ability of the financial variables tend to coincide. We find
relatively strong evidence of out-of-sample predictability for at least one of the horizons for M0,
M1, M2, M3, the lending rate and real share price growth rate. The term-spread and dividend yield
are added to the list when weaker versions of the out-of-sample test statistics are considered as well.
Given that we consider a large number of financial variables, when we checked the significant results
by accounting for data mining across the 11 financial variables, majority of these results ceases to
be significant, with only M0, M1 and M2 retaining some of its predictive ability.
Description
Keywords
Financial variables, Forecastability, Forecast encompassing, Industrial production, India
Sustainable Development Goals
Citation
Rangan Gupta, Yuxiang Ye & Christopher M. Sako (2013) Financial variables and the out-of-sample forecastability of the growth rate of indian industrial production, Technological and Economic Development of Economy, 19:sup1, S83-S99.