Can Industrial Production Growth Rate Predict Stock Market Return?

This study seeks to examine the predictability of Industrial production(IP)growth rate on stock market return using a monthly panel data set from Financial DataStream and the World Bank database from 2006 to 2017 for thirty countries comprising of the developed and emerging markets.We first find a statistical significantly positive predictability from industrial production growth rate to stock market return for all countries in our sample.In order to investigate whether this predictability relies on the type of markets,we farther estimate the regressions for developed markets and emerging markets respectively.For developed market,we obtain the same statistical significant and positive predictability,though power decreases when control covariates are included into the regression.Notwithstanding the emerging markets,we observe the prediction relationship to be positive and significant but not as strong as the case of developed market,and the relationship yield to negative as more other economic covariates were included in the regression.To check whether stock market returns reflect the information of industrial production(IP)growth rate,we estimate another predictive regression using IP growth rate as dependent variable for all countries,developed market only and emerging market only.Similarly,we find some significantly positive predictability for developed market,implying that developed markets are more efficient in incorporating information of the real economy than emerging markets.The findings indicates that industrial production growth rate has significant effects on the stock market growth and vice versa most especially the developed market and as such,there is the need to give attention to the various industrial sectors of the economy.