Abstract

Many studies have attempted to examine the predictive power of financial variables for numerous countries, but rarely does such research focus on future economic activities with respect to Australia. Financial variables are used to predict future economic events primarily because these variables are the closest indicators of the expectations and activities of investors and other economic agents. The recent global financial crisis (GFC) stemming from the subprime crisis shows that financial markets significantly influence global macroeconomic activities. In this study, we use major financial variables, such as the 90-day Treasury bill rate, 10-year Treasury bond rate, interest rate spread, and Australian stock index data. Similar to the housing prices in some other countries, those in Australia play a key role in future economic activities. In addition to financial variables, housing stock data is incorporated into our model for more realistic results, which are obtained by probit maximum likelihood estimation. We also use a general model for forecasting Australia’s GDP growth until the third quarter of 2012. The results support previous research findings, indicating that financial variables are a useful tool for forecasting future economic activities in Australia.

Keywords: Financial variables, Interest rates, Term structure, Maximum likelihood estimation, Recession

How to Cite:

Edirisuriya, P., (2015) “The Predictive Power of Financial Variables: New Evidence from Australia”, Australasian Accounting, Business and Finance Journal 9(1), 57-70. doi: https://doi.org/10.14453/aabfj.v9i1.5