Predicting returns and changes in real activity: evidence from emerging economies

This paper studies the relation between real activity and share prices in nine emerging economies. Especially, it is investigated whether the time series of real activity and share prices are cointegrated, whether the deviations from the cointegration relations contain information that can be used to predict returns and changes in real activity, and finally whether returns are proportional to the predictions of changes in real activity. The results reveal that the deviations from the cointegration relations contain information that can be used to predict returns and changes in real activity in those countries where cointegration between share prices and real activity cannot be rejected. Furthermore, it is also found that returns are not proportional to the predictions of changes in real activity.