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Analysing the Dynamics between U.S. Inflation and Dow Jones Index Using Non-Linear Methods

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  • Karagianni Stella

    ()
    (University of Macedonia)

  • Kyrtsou Catherine

    ()
    (University of Macedonia)

Abstract

A growing body of literature concentrates on the linear dependence between stock returns and inflation. Although the recent empirical evidence suggested the presence of complexities, to our knowledge only a few works have investigated the existence of a potential nonlinear stock returns-inflation relationship. In order to study in more depth the dynamic attributes of this puzzle, we suggest a quite different framework where the primary goal is to explore the association between their underlying dynamics. Through the use of the Recurrence Quantification Analysis (Webber and Zbilut (1994)), the test for structural breaks of Bai and Perron (1998) and the test for nonlinear causality of Diks and Panchenko (2006), we find evidence in favour of negative nonlinear linkages between the inherent dynamics of inflation and stock returns. The presence of nonlinearity reinforces uncertainty. As long as inter-dependences are complex and nonlinear, small perturbations in fundamentals can lead to unexpected propagations within the financial system.

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Bibliographic Info

Article provided by De Gruyter in its journal Studies in Nonlinear Dynamics & Econometrics.

Volume (Year): 15 (2011)
Issue (Month): 2 (March)
Pages: 1-25

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Handle: RePEc:bpj:sndecm:v:15:y:2011:i:2:n:4

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Cited by:
  1. Kollias, Christos & Kyrtsou, Catherine & Papadamou, Stephanos, 2013. "The effects of terrorism and war on the oil price–stock index relationship," Energy Economics, Elsevier, vol. 40(C), pages 743-752.
  2. Emmanuel Anoruo, 2011. "Testing for Linear and Nonlinear Causality between Crude Oil Price Changes and Stock Market Returns," International Journal of Economic Sciences and Applied Research (IJESAR), Technological Educational Institute (TEI) of Kavala, Greece, vol. 4(3), pages 75-92, December.
  3. Diks, C.G.H. & Papana, A. & Kyrtsou, K. & Kugiumtzis, D., 2013. "Partial Symbolic Transfer Entropy," CeNDEF Working Papers 13-16, Universiteit van Amsterdam, Center for Nonlinear Dynamics in Economics and Finance.

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