Is Rate of Stock Returns a Leading Indicator of Output Growth? In the Case of Four East Asian Countries

The link between stock returns and economic growth has been an important research topic in the financial economic literature. The purpose of this study is to employ a threshold vector autoregressive (TVAR) approach in order to investigate the non-linear relationship between stock returns and output growth in the four East Asian countries: Taiwan, Japan, Korea, and Malaysia. The causality between the two under different stock returns regimes are also examined in this study. The empirical findings of this modest study indicate that there is an asymmetric relationship between stock returns and industrial production growth in the four East Asian countries. Finally, the findings from the generalized impulse response function of the VAR model reveal that each country’s stock market disturbance has a greater impulse effect on output growth under bad news regime than under good news regime.