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Stock Prices and Economic Fluctuations:A Markov Switching Structural VectorAutoregressive Analysis

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  • Markku Lanne
  • Helmut Luetkepohl

Abstract

The role of expectations for economic fluctuations has received considerable attention in recent business cycle analysis. We exploit Markov regime switching models to identify shocks in cointegrated structural vector autoregressions and investigate different identification schemes for bi-variate systems comprising U.S. stock prices and total factor productivity. The former variable is viewed as reflecting expectations of economic agents about future productivity. It is found that some previously used identification schemes can be rejected in our model setup. The results crucially depend on the measure used for total factor productivity.

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Paper provided by CESifo Group Munich in its series CESifo Working Paper Series with number 2407.

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Date of creation: 2008
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Handle: RePEc:ces:ceswps:_2407

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Keywords: cointegration; Markov regime switching model; vector error correction model; structural vector autoregression; mixed normal distribution;

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References

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  1. Paul Beaudry & Franck Portier, 2006. "Stock Prices, News, and Economic Fluctuations," American Economic Review, American Economic Association, vol. 96(4), pages 1293-1307, September.
  2. Christiano, Lawrence J. & Eichenbaum, Martin & Evans, Charles L., 1999. "Monetary policy shocks: What have we learned and to what end?," Handbook of Macroeconomics, Elsevier, in: J. B. Taylor & M. Woodford (ed.), Handbook of Macroeconomics, edition 1, volume 1, chapter 2, pages 65-148 Elsevier.
  3. Beaudry, Paul & Portier, Franck, 2005. "The 'News' View of Economic Fluctuations: Evidence from Aggregate Japanese Data and Sectoral US Data," CEPR Discussion Papers 5176, C.E.P.R. Discussion Papers.
  4. Nir Jaimovich & Sergio Rebelo, 2006. "Can News About the Future Drive the Business Cycle?," 2006 Meeting Papers, Society for Economic Dynamics 31, Society for Economic Dynamics.
  5. Markku Lanne & Helmut Luetkepohl, 2005. "Structural Vector Autoregressions with Nonnormal Residuals," Economics Working Papers ECO2005/25, European University Institute.
  6. Hamilton, James D, 1989. "A New Approach to the Economic Analysis of Nonstationary Time Series and the Business Cycle," Econometrica, Econometric Society, Econometric Society, vol. 57(2), pages 357-84, March.
  7. Guido Lorenzoni, 2006. "A Theory of Demand Shocks," NBER Working Papers 12477, National Bureau of Economic Research, Inc.
  8. Lucke, Bernd & Haertel, Thomas, 2008. "Do News Shocks Drive Business Cycles? Evidence from German Data," Economics - The Open-Access, Open-Assessment E-Journal, Kiel Institute for the World Economy, vol. 2(10), pages 1-21.
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Cited by:
  1. Yukai Yang, 2014. "Testing Constancy of the Error Covariance Matrix in Vector Models against Parametric Alternatives using a Spectral Decomposition," CREATES Research Papers 2014-11, School of Economics and Management, University of Aarhus.

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