Predictive power of the ZEW sentiment indicator: Case of the German automotive industry

Abstract

This paper presents an analysis of German automotive industry and its connection to the market sentiment indicator ZEW. The analysis spans a period of the last decade and is divided into Pre-Crisis, Crisis and Post-Crisis periods. Research questions related to the predictive power of ZEW indicator on macro level indicators (composite DAX and GDP), sector indicator (technology-oriented companies TecDAX) and a selected automotive manufacturer (BMW) were answered. We found that ZEW index had foreseen the economic crisis starting in the March 2008 three months ahead of its start, but failed to see an upcoming economic recovery. We fit two models to estimate whether ZEW index can be used as a standalone forecasting instrument or whether inclusion of lagged values of other variables improves forecasting ability. We conclude that predictions from the ZEW-only models are worse in the test sample than those of the more complex model. We provide further evidence in form cross-correlations and causality analysis in the Granger sense. The study concludes with Impulse Response Function analysis. This analysis found that reaction of TecDAX on change of ZEW is strongest amongst studied variables. © 2018, Budapest Tech Polytechnical Institution. All rights reserved.