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Factor analysis of permanent and transitory dynamics of the US economy and the stock market

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  • Zeynep Senyuz

Abstract

We analyze dynamics of the permanent and transitory components of the U.S. economic activity and the stock market obtained by multivariate dynamic factor modeling. We capture asymmetries over the phases of economic and stock market trends and cycles using independent Markov-switching processes. We show that both output and stock prices contain significant transitory components, while consumption and dividends are useful to identify their respective permanent components. The extracted economic trend perfectly predicts all post-war recessions. Our results shed light to the nature of the bilateral predictability of the economy and the stock market. The transitory stock market component signals recessions with an average lead of one quarter, whereas the market trend is correlated with the economic trend with varying lead/lag times.

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Article provided by John Wiley & Sons, Ltd. in its journal Journal of Applied Econometrics.

Volume (Year): 26 (2011)
Issue (Month): 6 (09)
Pages: 975-998

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Handle: RePEc:wly:japmet:v:26:y:2011:i:6:p:975-998

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Cited by:
  1. Chauvet, Marcelle & Senyuz, Zeynep & Yoldas, Emre, 2010. "What does financial volatility tell us about macroeconomic fluctuations?," MPRA Paper 34104, University Library of Munich, Germany, revised Jun 2011.
  2. Richard G. Anderson & Barry Jones & Marcelle Chauvet, 2013. "Nonlinear relationship between permanent and transitory components of monetary aggregates and the economy," Working Papers 2013-018, Federal Reserve Bank of St. Louis.
  3. James Morley & Irina B. Panovska & Tara M. Sinclair, 2013. "Testing Stationarity for Unobserved Components Models," Discussion Papers 2012-41A, School of Economics, The University of New South Wales.

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