Out-Of-This-World Research

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New York – Many creative ways of conducting independent research have been used by equity research professionals in their quest for achieving unique information. Supply chain tracking, mall intercepts, and custom surveys are just a few research methods that have historically been used by investment institutions to gain an edge.  Recently, a new out-of-this-world research mechanism has been implemented to measure economic growth: satellite data on nighttime light density. Potentially, this data can be used as a proxy for economic growth at the national and regional levels.

Measuring Economic Growth from Outer Space, a NBER working paper issued in July of 2009, suggests that gross domestic product (GDP) can be estimated through satellite images of the area’s nighttime lights.  The authors of the study, three economists from Brown University, argue that combining standard income data with the changes observed from outer space in a region’s nighttime density of light can provide a more accurate account of the region’s growth and indicate potential investment opportunities. An excerpt from the report follows:

“Intensity of night lights reflects outdoor and some indoor use of lights. However, more generally, consumption of nearly all goods in the evening requires lights. As income rises, so does light usage per person, in both consumption activities and many investment activities. Obviously this is a complex relationship, and we abstract from such issues as public versus private lighting, relative contributions of consumption versus investment, and the relationship between daytime and nighttime consumption and investment… Growth in lights is just another proxy measure for true growth in income, where the advantage of lights data over other proxies is that they are readily available.”

The paper addresses the issue that GDP is often poorly measured, especially in developing countries easily leading researchers to erroneous conclusions. GDP measurement in these countries is especially difficult given that not all the economic activity is conducted within the formal sector.  Furthermore, in these countries the degree of economic integration across regions is lower, and the official measurement infrastructures are weaker.

Nighttime light data is recorded by US Air Force weather satellites, which circle the earth 14 times per day. The data is not only readily available, but allows for a great degree of geographic granularity. The data is therefore uniquely suited to detailed and updated analyses of economic activity at the regional level.

The authors argue that even if changes in light density observed from space are subject to measurement error, it is a valuable tool as a complement to official data since “it is well known that several error-prone measures are better than one, especially if there is no reason to think that the measurement errors are correlated.”

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