A Practical Approach to Identify Business Cycles for Equity Investment in Thailand

Abstract

The objective of this paper is to identify business cycles in Thailand using a simplified methodology which has never been tested empirically. The paper attempted to establish an appropriate proxy and model specification for business cycle identification. Among others, the results show that three competing proxies; GDP, MPI, and CEI could be used as a proxy for business cycle identification. However, the conventional GDP is more appropriate according to its most correlation with equity market return on peak and through also with the rationale of being a representative of aggregated output in service-based economy. Next, we use positive and negative changes of real GDP over the study period to describe Thai business cycle. We also test two regression models using steady zero-growth line which is a proposed contribution of this study and conventional long-run average trend line in defining stages of business cycle with dummy variables. The results show that the model using steady zero-growth line has better model specifications comparing to a model using long-run average trend line in defining business cycle stages. The results confirm the applicability of using real GDP growth (YoY, seasonally adjusted) together with its cyclical fluctuation along the steady zero-growth line as a simplified method for assessment of equity return along the different stages of business cycle in Thailand.