Permanent and transitory components of GDP and stock prices: further analysis
AbstractUsing the conventional VAR identification approach, Cochrane (1994) finds that substantial amounts of variation in GDP growth and stock returns are due to transitory shocks. Following the common trend decomposition of King, et al. (1991), we show that Cochrane's results depend on the assumption of weak exogeneity of one of the variables with respect to the cointegration vector. When this assumption holds both approaches coincide. If not, the shocks Cochrane called transitory are not totally transitory. In this case, the conventional VAR approach with the assumption of the weak exogeneity may overstate the magnitude of transitory shocks and understate that of permanent shocks. We find that the permanent components of GDP and stock prices are much larger than those estimates of Cochrane, although substantial (but much smaller than in Cochrane (1994)) variations in GDP growth and stock returns are attributed to transitory shocks.
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Bibliographic InfoPaper provided by Universidad Carlos III, Departamento de Economía in its series Economics Working Papers with number we20070525.
Date of creation: May 2007
Date of revision:
Other versions of this item:
- Jesus Gonzalo & Tae-Hwy Lee & Weiping Yang, 2008. "Permanent and transitory components of GDP and stock prices: further analysis," Macroeconomics and Finance in Emerging Market Economies, Taylor & Francis Journals, Taylor & Francis Journals, vol. 1(1), pages 105-120.
- C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes
- E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth
- E30 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - General (includes Measurement and Data)
This paper has been announced in the following NEP Reports:
- NEP-ALL-2007-09-24 (All new papers)
- NEP-ETS-2007-09-24 (Econometric Time Series)
- NEP-MAC-2007-09-24 (Macroeconomics)
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"Why Does the Stock Market Fluctuate?,"
NBER Working Papers
3995, National Bureau of Economic Research, Inc.
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