Forecasting Financial Markets With the GMPRI

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Central Bank News

Feb 25, 2012, 5:58:13 PM2/25/12
In this article we examine the potential application of the Global Monetary Policy Rate Indexes in forecasting  and understanding financial market trends. We look at the developed and emerging rate indexes and key stock indexes; the S&P 500, the Hang Seng, and the US 10 Year government bond yield, and a commodities index. We find some link in movements between the indexes, with a few notable conclusions.

The first chart shows the path of the annual change in the developed markets rate index in relation to the S&P 500. The analysis focus on the change, rather than the level. As can be seen in the chart there is a loose link between the two series, as the stock market both predicts and reacts to monetary policy settings. However there is little predictive power, aside from significant drops in the policy rate index occasionally coinciding with large spikes in 1 year returns.
Similarly, on an emerging market basis, looking at the emerging markets monetary policy rate index and a key emerging market stock index; the Hang Seng, there is a similar link. The more pronounced pattern is a link between down spikes in the policy rate index and up spikes in the stock index (and vice versa).
Moving on to the US 10 year bond yield, there is a weak link between the annual change in the emerging and developed market composite monetary policy rate index and the US 10 year government bond yield. In this case there appears to be more of a leading effect by the ten year to the index.
The final chart shows the link between the emerging and developed markets composite monetary policy rate index, and the Thomson Reuters/Jefferies CRB Commodities index. As might be expected, there is a relatively strong link between the indexes, as monetary policy is often calibrated to counter inflation (which is also linked with commodity prices).

So this brief analysis shows there is some value in using the Global Monetary Policy Rate Index in forecasting and understanding trends in financial markets. The index appears negatively related to stock index movements, positively and lagged related to bond yield movements, and relatively strong positively related to commodity price index movements.

You can perform similar analysis with the Global Monetary Policy Rate Indexes with the originalData here.

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