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An Empirical Analysis of Real Activity and Stock Returns in an Emerging Market

Treatment of stock acquisition rights at the time of reorganization If the Company conducts a merger (only when the Company no longer exists due to the merger), acquisition and split, new establishment and split, equity swap, or stock transfer (hereinafter collectively referred to as the “Reorganization Acts”), it shall deliver stock acquisition rights of joint stock companies indicated in Article 236-1-8-(a) to (e) of the Companies Act (hereinafter referred to as the “Companies Subject to Reorganization”) to those qualified for receiving stock acquisition rights which are outstanding on the day the Reorganization Acts become effective (hereinafter referred to as the “Outstanding Stock Acquisition Rights”) in respective cases under the. | ECONOMIC ANALYSIS POLICY VOL. 40 NO. 2 SEPTEMBER 2010 An Empirical Analysis of Real Activity and Stock Returns in an Emerging Market Mansor H Ibrahim Department of Economics Universiti Putra Malaysia Email mansorhi@econ.upm.edu.my Abstract The present paper analyzes the role of stock market returns as a predictor of real output for a fast-growing emerging market Malaysia. In the analysis forecasting equations for 1- 2- 4- and 8-quarter forecasting horizons based on autoregressive distributed lags framework are adopted. From the estimation we find evidence that stock market returns do contain predictive ability at short-forecasting horizons especially at less than 4-quarter horizons. Estimating the forecasting models recursively we note reduction of out-of-sample forecasting evaluation statistics namely the mean absolute errors MAE and the mean squared forecast errors MSFE from those obtained from the simple autoregressive AR model. More importantly the null hypothesis of equal predictive accuracy between the model with stock returns as a predictor and the AR model is rejected for the 1-quarter and 2-quarter forecasting horizons by the McCraken s 2007 out-of-sample-F statistics. I. INTRODUCTION The significance of anticipating future variations in real activities is well stated by the extensive number of empirical studies attempting to best forecast real output. Among many variables considered in the output forecasting exercises financial prices particularly stock prices seem to be central. Indeed there are early notable studies that document the predictive ability of stock prices for the US case. Among them include Fama 1981 Moore 1983 Fischer and Merton 1984 and Barro 1990 . However the extension by Aylward and Glen 2000 to emerging markets seems to yield weaker evidence. Arguably the stock prices have an edge as a predictor of real activity since stock price data are readily available and accordingly cater the need to have a timely forecast. Moreover they are in