Stock returns and the short-run predictability of health expenditure: Some empirical evidence

Abstract

The rising cost of health care, compounded with an aging population, has been the subject of constant discussion in the popular media. Accurate forecasts of health care expenditure are therefore important for both policy makers and industrial practitioners. Extending a branch of the macroeconomics literature that examines the role of asset prices as useful predictors of major macro variables (such as consumption, output growth and inflation), this study investigates whether the current equity market captures useful information on the growth of future health care expenditure. We focus on short-run (one-year) predictability. The preliminary evidence based on US data shows that industry-specific stock returns have some predictive power for personal health care expenditure and its major components (hospital care, durable medical equipment and prescription drugs). Nevertheless, the significance of the improvement in forecasting accuracy depends on the estimation scheme and whether parameter inconstancy is accounted for.