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The effects of macroeconomic shocks on sector-specific returns

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  • Bradley Ewing
  • Shawn Forbes
  • James Payne

Abstract

The reliance on market and sector-specific indexes to evaluate managed portfolios and the popularity of index investing has increased the importance of understanding what leads to market movements, how long they may last, and how different sectors respond to macroeconomic shocks. This research is concerned with how shocks to macroeconomic variables affect five major S&P sector-specific stock market indexes. The paper employs the newly developed econometric technique of generalized impulse response analysis. The results identify the various responses of the sectors to unanticipated changes in some key macroeconomic variables. Asset prices are commonly believed to react sensitively to economic news. Daily experience seems to support the view that individual asset prices are influenced by a wide variety of unanticipated events and that some events have a more pervasive effect on asset prices than do others. (Chen et al. 1986, p. 386)

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Bibliographic Info

Article provided by Taylor & Francis Journals in its journal Applied Economics.

Volume (Year): 35 (2003)
Issue (Month): 2 ()
Pages: 201-207

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Handle: RePEc:taf:applec:v:35:y:2003:i:2:p:201-207

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References

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  1. Thorbecke, Willem, 1997. " On Stock Market Returns and Monetary Policy," Journal of Finance, American Finance Association, vol. 52(2), pages 635-54, June.
  2. Pesaran, M. H. & Shin, Y., 1997. "Generalised Impulse Response Analysis in Linear Multivariate Models," Cambridge Working Papers in Economics 9710, Faculty of Economics, University of Cambridge.
  3. Ewing, Bradley T, 2001. "Monetary Policy and Stock Returns," Bulletin of Economic Research, Wiley Blackwell, vol. 53(1), pages 73-79, January.
  4. Estrella, Arturo & Mishkin, Frederic S., 1997. "Is there a role for monetary aggregates in the conduct of monetary policy?," Journal of Monetary Economics, Elsevier, vol. 40(2), pages 279-304, October.
  5. David E. Runkle, 1987. "Vector autoregressions and reality," Staff Report 107, Federal Reserve Bank of Minneapolis.
  6. Ewing, Bradley T., 2001. "Cross-Effects of Fundamental State Variables," Journal of Macroeconomics, Elsevier, vol. 23(4), pages 633-645, October.
  7. Friedman, Milton, 1988. "Money and the Stock Market," Journal of Political Economy, University of Chicago Press, vol. 96(2), pages 221-45, April.
  8. Sims, Christopher A, 1980. "Macroeconomics and Reality," Econometrica, Econometric Society, vol. 48(1), pages 1-48, January.
  9. Chen, Nai-Fu & Roll, Richard & Ross, Stephen A, 1986. "Economic Forces and the Stock Market," The Journal of Business, University of Chicago Press, vol. 59(3), pages 383-403, July.
  10. Aggarwal, Reena & Inclan, Carla & Leal, Ricardo, 1999. "Volatility in Emerging Stock Markets," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 34(01), pages 33-55, March.
  11. Ben S. Bernanke & Alan S. Blinder, 1989. "The federal funds rate and the channels of monetary transmission," Working Papers 89-10, Federal Reserve Bank of Philadelphia.
  12. Koop, Gary & Pesaran, M. Hashem & Potter, Simon M., 1996. "Impulse response analysis in nonlinear multivariate models," Journal of Econometrics, Elsevier, vol. 74(1), pages 119-147, September.
  13. Ewing, Bradley T & Payne, James E & Forbes, Shawn M, 1998. "Co-movements of the Prime Rate, CD Rate, and the S&P Financial Stock Index," Journal of Financial Research, Southern Finance Association & Southwestern Finance Association, vol. 21(4), pages 469-82, Winter.
  14. Runkle, David E, 1987. "Vector Autoregressions and Reality: Reply," Journal of Business & Economic Statistics, American Statistical Association, vol. 5(4), pages 454, October.
  15. Lee, Bong-Soo, 1995. "The Response of Stock Prices to Permanent and Temporary Shocks to Dividends," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 30(01), pages 1-22, March.
  16. Chen, Nai-Fu, 1991. " Financial Investment Opportunities and the Macroeconomy," Journal of Finance, American Finance Association, vol. 46(2), pages 529-54, June.
  17. Runkle, David E, 1987. "Vector Autoregressions and Reality," Journal of Business & Economic Statistics, American Statistical Association, vol. 5(4), pages 437-42, October.
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Citations

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Cited by:
  1. Díaz, Antonio & Jareño, Francisco, 2009. "Explanatory factors of the inflation news impact on stock returns by sector: The Spanish case," Research in International Business and Finance, Elsevier, vol. 23(3), pages 349-368, September.
  2. Wang, Zijun & Kutan, Ali M. & Yang, Jian, 2005. "Information flows within and across sectors in Chinese stock markets," The Quarterly Review of Economics and Finance, Elsevier, vol. 45(4-5), pages 767-780, September.
  3. Chi-Wei Su, 2012. "The relationship between exchange rate and macroeconomic variables in China," Zbornik radova Ekonomskog fakulteta u Rijeci/Proceedings of Rijeka Faculty of Economics, University of Rijeka, Faculty of Economics, vol. 30(1), pages 33-56.
  4. Malik, Farooq & Ewing, Bradley T., 2009. "Volatility transmission between oil prices and equity sector returns," International Review of Financial Analysis, Elsevier, vol. 18(3), pages 95-100, June.
  5. Su, Chi-Wei, 2011. "Non-linear causality between the stock and real estate markets of Western European countries: Evidence from rank tests," Economic Modelling, Elsevier, vol. 28(3), pages 845-851, May.
  6. Mensi, Walid & Beljid, Makram & Boubaker, Adel & Managi, Shunsuke, 2013. "Correlations and volatility spillovers across commodity and stock markets: Linking energies, food, and gold," MPRA Paper 44395, University Library of Munich, Germany.
  7. Tsai, Chun-Li, 2011. "The reaction of stock returns to unexpected increases in the federal funds rate target," Journal of Economics and Business, Elsevier, vol. 63(2), pages 121-138, March.
  8. Ahmed, Walid M.A., 2011. "Comovements and Causality of Sector Price Indices: Evidence from the Egyptian Stock Exchange," MPRA Paper 28127, University Library of Munich, Germany.
  9. Vardhan, Harsh & Vij, Madhu & Sinha, Pankaj, 2013. "Insight of Indian sector indices for the post subprime crisis period: a vector error correction model approach," MPRA Paper 49962, University Library of Munich, Germany.
  10. Dunbar, Kwamie & Amin, Abu S., 2012. "Credit risk dynamics in response to changes in the federal funds target: The implication for firm short-term debt," Review of Financial Economics, Elsevier, vol. 21(3), pages 141-152.
  11. Hassan, Syed Aun & Malik, Farooq, 2007. "Multivariate GARCH modeling of sector volatility transmission," The Quarterly Review of Economics and Finance, Elsevier, vol. 47(3), pages 470-480, July.

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