||This paper discusses the relationship between the US purchasing manager index (PMI) and Vanguard ETF (VTI). We utilized PCA method (Principal Component Analysis), which is adopted by Stock & Watson (1998, 2002), in an attempt to establish a modified PMI index to better predict the stock market performance. A new PMI index was built with six leading indicators. In-Sample and Out-Sample test are adopted to test the feasibility of the method. By reading this study, we expect to enhance the forecast ability of the economic business cycle for economic research units or for private research institutions.|
This study based on the leading indicators often used by well-known investment research reports. US initial claims for unemployment benefits, housing starts, Merrill Lynch High Yield Bond Index, ECRI Leading Indicator, OECD index for United States and Sotheby stock price (BID:US) were then added into US PMI manufacturing index to discuss the ability to predict the US stock market.
We used principal component analysis (PCA) and Mean Squared Error-based research as a framework. The empirical results of this study are as followed:
1. In principal component analysis, we used the first difference of the leading indicators to construct a new PMI indicator. In the results of the causality test and the correlation coefficient pointed out a significant positive correlation coefficient between the Modified PMI and VTI. However, such a relationship was not found with DPMI.
2. According to the comprehensive index built with PRC, between 1997 and 2014.10 sample interval, the following results have been found when making the causal correlation coefficient test: PMI does not lead VTI, instead, VTI leads PMI. In addition, there is a bi-directional causality between VTI and Modified PMI. (There is more evidence showing that VTI leads Modified PMI.)
3. There is an apparent deviation of the effect to track VTI index using Modified PMI index after 2012. The reason is because there is large difference in the stock index between the good industries and the bad industries in lots of countries in the recent years. If the US stock market performance cannot lead the stock market as in 1998-2012 when the market performance was driven by the real estate and stock service sector, the forecasting ability of the new PMI index will be limited.
Key word：PMI、VTI、Modified PMI、Principal Component Analysis、Mean Squared Error。