An investigation of the forecasting ability of economic tracking portfolios

An economic tracking portfolio is a set of financial assets whose return is sufficiently correlated with a target economic variable by construction. This paper examines the forecasting performance of economic tracking portfolios for the U.S. economy. Economic tracking portfolios are estimated using monthly stock and bond portfolio returns as base assets for four target macro-variables: industrial production growth, consumption growth, labour income growth, and inflation. The insignificant results from the in-sample estimation and the out-of-sample forecast indicate that the forecasting power of the 12-months ahead economic tracking portfolios are not as strong as what are concluded by some other empirical works.