The Performance of Economic Tracking Portfolios in an It-Sensitive Stock Market

In this paper we use an economic tracking portfolio (ETP) approach for forecasting future values of macroeconomic variables in the IT-sensitive Finnish stock market. The results confirm recently obtained conclusions in Lamont (2001), Hayes (2001) and Junttila (2002) that ETPs contain relevant information about macroeconomic variables. According to our results, when compared to the market portfolio, different industry portfolios might forecast the future macroeconomic variables better. The analysis also shows that the control variables may not play such an important role in a closed-economy context when compared to earlier studies using an international asset return data set in the ETP framework. It seems to be more important to consider carefully the choice of base assets and their account. The results also give clear support for the use of industry portfolios in out-of-sample forecasting in the ETP framework. Especially the 'new economy' stock returns (like the IT-return) have clear forecasting power for future inflation and changes in industrial production in the Finnish economy at short horizons