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Breakdowns and revivals: the long-run relationship between the stock market and real economic activity in the G-7 countries

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  • Lyócsa, Štefan
  • Výrost, Tomáš
  • Baumöhl, Eduard

Abstract

Using monthly observations of industrial production and stock market indices from January 1961 to May 2012, we analyse the long-run relationship between the stock markets and real economic activity in the G-7 countries. In particular, this analysis uses the Toda and Yamamoto (1995) approach with the leveraged bootstrap methodology that was proposed by Hacker and Hatemi-J (2006). Our results indicate that although the expected long-run relationship holds for most of the G-7 countries, a break in this relationship occurred in the 1980s, followed by a subsequent revival after 2001.

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Bibliographic Info

Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 43306.

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Date of creation: 17 Dec 2012
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Handle: RePEc:pra:mprapa:43306

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Keywords: real economic activity; stock markets; G-7; long-run relationship;

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  1. A. F. Darrat & R. N. Dickens, 1999. "On the interrelationships among real, monetary, and financial variables," Applied Financial Economics, Taylor & Francis Journals, vol. 9(3), pages 289-293.
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  3. A. Hatemi-J, 2003. "A new method to choose optimal lag order in stable and unstable VAR models," Applied Economics Letters, Taylor & Francis Journals, vol. 10(3), pages 135-137.
  4. Akhter Faroque & William Veloce & Jean-Francois Lamarche, 2012. "Have structural changes eliminated the out-of-sample ability of financial variables to forecast real activity after the mid-1980s? Evidence from the Canadian economy," Applied Economics, Taylor & Francis Journals, vol. 44(30), pages 3965-3985, October.
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  14. Mathias Binswanger, 2000. "Stock returns and real activity: is there still a connection?," Applied Financial Economics, Taylor & Francis Journals, vol. 10(4), pages 379-387.
  15. Annaliisa Kankainen & Sara Taskinen & Hannu Oja, 2007. "Tests of multinormality based on location vectors and scatter matrices," Statistical Methods and Applications, Springer, vol. 16(3), pages 357-379, November.
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  17. Cheung, Yin-Wong & Lai, Kon S, 1995. "Lag Order and Critical Values of a Modified Dickey-Fuller Test," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 57(3), pages 411-19, August.
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