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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.
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Notes on contributors
Rangan Gupta
Rangan GUPTA. Doctor, Professor at the Department of Economics, University of Pretoria. First degree in Economics, Calcutta University (1997); Master of Science (1999); Doctor (2005). Author of about 130 scientific articles. Research interests include macroeconomics and time series econometrics.
Yuxiang Ye
Yuxiang YE. She is a PhD candidate in Economics at the Department of Economics, University of Pretoria.
Christopher M. Sako
Christopher SAKO. He is a PhD candidate in Economics at the Department of Economics, University of Pretoria.