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Long-run and Cyclical Dynamics in the US Stock Market

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Author Info
Caporale, Guglielmo Maria (London South Bank University)
Gil-Alana, Luis A. (Department of Economics, University of Navarra)

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Abstract

This paper examines the long-run dynamics and the cyclical structure of the US stock market using fractional integration techniques, specifically a version of the tests of Robinson (1994a) which allows for unit (or fractional) roots both at the zero (long-run) and at the cyclical frequencies. We consider 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 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, most series appear to be stationary and to exhibit long memory. Further, mean reversion occurs. Finally, the fractional (at zero and cyclical) models are shown to forecast more accurately than rival ones based on fractional and integer differentiation exclusively at the zero frequency.

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File URL: http://www.ihs.ac.at/publications/eco/es-155.pdf
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Publisher Info
Paper provided by Institute for Advanced Studies in its series Economics Series with number 155.

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Length: 29 pages
Date of creation: May 2004
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Handle: RePEc:ihs:ihsesp:155

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Related research
Keywords: Stock market; Fractional cycles; Long memory; Gegenbauer processes;

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Find related papers by JEL classification:
C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions
G12 - Financial Economics - - General Financial Markets - - - Asset Pricing
G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies

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