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Distilling co-movements from persistent macro and financial series

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  • Abadir, Karim
  • Talmain, Gabriel

Abstract

We provide a methodology to disentangle the long-run relation between variables from their own dynamics. Macroeconomic and aggregate financial series have a high degree of inertia. If this persistence is not properly accounted for, spurious correlations will give rise to paradoxes. Our procedure shows that the Uncovered Interest Parity (UIP) puzzle evaporates when the dynamics are properly modelled: the forward premium loses all the predictive power that it seemed to have. We also show how the stock market grows in long cycles around a trend given by GDP, in a stable relation that does not break. JEL Classification: E37

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Bibliographic Info

Paper provided by European Central Bank in its series Working Paper Series with number 0525.

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Date of creation: Sep 2005
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Handle: RePEc:ecb:ecbwps:20050525

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Related research

Keywords: ACF-based GLS procedure; Autocorrelation Function; long memory; Nonlinearities; Uncovered Interest Parity anomaly;

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  1. Francis X. Diebold & Javier Gardeazabal & Kamil Yilmaz, 1993. "On cointegration and exchange rate dynamics," Working Papers 93-2, Federal Reserve Bank of Philadelphia.
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Cited by:
  1. Gianluca, MORETTI & Giulio, NICOLETTI, 2008. "Estimating DGSE models with long memory dynamics," Discussion Papers (ECON - Département des Sciences Economiques) 2008037, Université catholique de Louvain, Département des Sciences Economiques.

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