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Long Run And Cyclical Dynamics In The Us Stock Market

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  • Guglielmo Maria Caporale

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  • Luis A. Gil-Alana

Abstract

This paper examines the long-run dynamics and the cyclical structure of the US stock market using fractional integration techniques. We implement a version of the tests of Robinson (1994a), which enables one to consider unit roots with possibly fractional orders of integration both at the zero (long-run) and the cyclical frequencies. We examine the following series: inflation, real risk-free rate, real stock returns, equity premium and price/dividend ratio,annually from 1871 to 1993. When focusing exclusively on the long-run or zero frequency, the estimated order of integration varies considerably, but nonstationarity is found only for the price/dividend ratio. When the cyclical component is also taken into account, the series appear to be stationary but to exhibit long memory with respect to both components in almost all cases. The exception is the price/dividend ratio, whose order of integration is higher than 0.5 but smaller than 1 for the long-run frequency, and is between 0 and 0.5 for the cyclical component. Also, mean reversion occurs in all cases. Finally, we use six different criteria to compare the forecasting performance of the fractional (at both zero and cyclical frequencies) models with others based on fractional and integer differentiation only at the zero frequency. The results show that the former outperform the others in a number of cases.

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Bibliographic Info

Paper provided by Economics and Finance Section, School of Social Sciences, Brunel University in its series Economics and Finance Discussion Papers with number 05-09.

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Length: 46 pages
Date of creation: Jun 2005
Date of revision:
Handle: RePEc:bru:bruedp:05-09

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Postal: Brunel University, Uxbridge, Middlesex UB8 3PH, UK

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Cited by:
  1. Guglielmo Maria Caporale & Luis A. Gil-Alana, 2011. "Long Memory and Fractional Integration in High-Frequency British Pound / Dollar Spot Exchange Rates," Faculty Working Papers 02/11, School of Economics and Business Administration, University of Navarra.
  2. Luis A. Gil-Alana & Yun Cao, 2010. "Stock market prices in China. Efficiency, mean reversion, long memory volatility and other implicit dynamics," Faculty Working Papers 12/11, School of Economics and Business Administration, University of Navarra.
  3. Rania Jammazi & Chaker Aloui, 2014. "Cyclical components and dual long memory in the foreign exchange rate dynamics: the Tunisian case," Working Papers 2014-198, Department of Research, Ipag Business School.

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