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Wavelet analysis of stock returns and aggregate economic activity

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  • Gallegati, Marco

Abstract

The relationship between stock market returns and economic activity is investigated using signal decomposition techniques based on wavelet analysis. After the application of the maximum overlap discrete wavelet transform (MODWT) to the DJIA stock price index and the industrial production index for the US over the period 1961:1-2006:10 wavelet variance and cross-correlations analyses are used to investigate the scaling properties of the series and the lead/lag relationship between them at different time scales. The results show that stock market returns tend to lead the level of economic activity, but only at the highest scales (lowest frequencies) corresponding to periods of 16 months and longer, and that the leading period increases as the wavelet time scale increases.

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Bibliographic Info

Article provided by Elsevier in its journal Computational Statistics & Data Analysis.

Volume (Year): 52 (2008)
Issue (Month): 6 (February)
Pages: 3061-3074

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Handle: RePEc:eee:csdana:v:52:y:2008:i:6:p:3061-3074

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Web page: http://www.elsevier.com/locate/csda

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References

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Citations

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Cited by:
  1. Gallegati, Marco & Ramsey, James B., 2013. "Structural change and phase variation: A re-examination of the q-model using wavelet exploratory analysis," Structural Change and Economic Dynamics, Elsevier, vol. 25(C), pages 60-73.
  2. Chaker Aloui & Duc Khuong Nguyen, 2014. "On the detection of extreme movements and persistent behavior in Mediterranean stock markets: a wavelet-based approach," Working Papers 2014-184, Department of Research, Ipag Business School.
  3. Peter Martey Addo & Monica Billio & Dominique Guegan, 2012. "Studies in Nonlinear Dynamics and Wavelets for Business Cycle Analysis," Documents de travail du Centre d'Economie de la Sorbonne 12023r, Université Panthéon-Sorbonne (Paris 1), Centre d'Economie de la Sorbonne, revised Nov 2013.
  4. Peter Martey Addo & Monica Billio & Dominique Guegan, 2012. "Alternative Methodology for Turning-Point Detection in Business Cycle : A Wavelet Approach," Université Paris1 Panthéon-Sorbonne (Post-Print and Working Papers) halshs-00694420, HAL.
  5. Caraiani, Petre, 2012. "Money and output: New evidence based on wavelet coherence," Economics Letters, Elsevier, vol. 116(3), pages 547-550.
  6. Caraiani, Petre, 2012. "Stylized facts of business cycles in a transition economy in time and frequency," Economic Modelling, Elsevier, vol. 29(6), pages 2163-2173.
  7. Rita Sousa & Luís Aguiar-Conraria & Maria Joana Soares, 2014. "Carbon Financial Markets: a time-frequency analysis of CO2 price drivers," NIPE Working Papers 03/2014, NIPE - Universidade do Minho.
  8. repec:hal:journl:halshs-00694420 is not listed on IDEAS
  9. Fernández-Macho, Javier, 2012. "Wavelet multiple correlation and cross-correlation: A multiscale analysis of Eurozone stock markets," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 391(4), pages 1097-1104.
  10. Buerhan Saiti & Azlan Ali & Naziruddin Abdullah & Sulaiman Sajilan, 2014. "Palm Oil Price, Exchange Rate, and Stock Market: A Wavelet Analysis on the Malaysian Market," Eurasian Journal of Economics and Finance, Eurasian Publications, vol. 2(1), pages 13-27.
  11. Hamrita, Mohamed Essaied & Ben Abdallah, Nidhal & Ben Ammou, Samir, 2009. "The Multi-Scale Interaction between Interest Rate, Exchange Rate and Stock Price," MPRA Paper 18424, University Library of Munich, Germany.
  12. Mara Madaleno & Carlos Pinho, 2010. "Hedging Performance and Multiscale Relationships in the German Electricity Spot and Futures Markets," Journal of Risk and Financial Management, MDPI, Open Access Journal, vol. 3(1), pages 26-62, December.
  13. Kaijian He & Kin Keung Lai & Guocheng Xiang, 2012. "Portfolio Value at Risk Estimate for Crude Oil Markets: A Multivariate Wavelet Denoising Approach," Energies, MDPI, Open Access Journal, vol. 5(4), pages 1018-1043, April.
  14. Gallegati, Marco & Ramsey, James B. & Semmler, Willi, 2014. "Interest rate spreads and output: A time scale decomposition analysis using wavelets," Computational Statistics & Data Analysis, Elsevier, vol. 76(C), pages 283-290.
  15. Foued Saâdaoui, 2013. "The Price and Trading Volume Dynamics Relationship in the EEX Power Market: A Wavelet Modeling," Computational Economics, Society for Computational Economics, vol. 42(1), pages 47-69, June.
  16. Luís Aguiar-Conraria & Maria Soares, 2011. "Oil and the macroeconomy: using wavelets to analyze old issues," Empirical Economics, Springer, vol. 40(3), pages 645-655, May.
  17. Silvo Dajčman, 2013. "Interdependence Between Some Major European Stock Markets - A Wavelet Lead/Lag Analysis," Prague Economic Papers, University of Economics, Prague, vol. 2013(1), pages 28-49.

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