Financial Update (Second Quarter 2004)


 Deterring Money

 Surprising Effects

 Conference Eyes
 Wall Street's Future

 Guynn Discusses
 Growth, Policy

 Fed Guidance
 on Fair Banking

 Check Processing

 Mortgage Market
 Hits Record

 New Call Report
 Web Site

 Do Markets Reveal
 Their Future

 New $50 Unveiled

 Davis Joins
 Atlanta Fed Board

 Atlanta Fed Hosts
 ACH Conference

 Atlanta Fed Issues
 2003 Annual Report


 New Atlanta Fed
 Subscriber Service


 Data Bank

 Circular Letters



Nosing Out the News in Financial Asset Returns

The notion that financial asset returns are useful for predicting the future course of the economy is widespread. But detailed analyses provide little support for financial markets’ ability to reveal future economic activity. Even though the evidence on various indicators used by different researchers is mixed, a recent Economic Review article explores the notion that financial markets reveal useful information about future economic activity.

Authors Gerald P. Dwyer Jr. and Cesare Robotti examine and answer two questions: First, what is a good way of extracting information about future economic activity from asset prices? Second, do financial asset returns help predict economic activity over horizons from one month to five years?

Center for Research in Security Prices working papers
National Bureau of Economic Research

To determine whether news of an asset’s excess return can reveal information about unexpected economic activity, the authors construct a method of extracting the news about future economic activity from returns on financial assets. The authors use linear regressions to relate the unexpected parts of economic activity and the asset’s return to actual economic activity and the actual return on an asset.

The evidence in the article shows that movements in financial markets do presage developments in the economy. The authors find that movements in the overall stock market and bond returns are the most important financial indicators. It remains to be seen whether those indicators hold up to variations in technique or the passage of time.