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Macro and Financial Markets: The Memory of an Elephant?

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  • Karim M. Abadir

    ()
    (Imperial College London, London, UK and The Rimini Centre for Economic Analysis, Italy)

  • Gabriel Talmain

    ()
    (University of Glasgow, Glasgow, UK)

Abstract

Macroeconomic and aggregate financial series share an unconventional type of nonlinear dynamics. Existing techniques (like co-integration) model these dynamics incompletely, hence generating seemingly paradoxical results. To avoid this, we provide a methodology to disentangle the long-run relation between variables from their own dynamics, and illustrate with two applications. First, in the forward-premium puzzle, adding a component quantifying the persistent nonlinear dynamics of exchange rates yields substantial predictability and makes the forward-premium term insignificant. Second, S&P 500 grows in a pattern of momentum followed by reversal, forming long cycles around a trend given by GDP, a stable non-breaking relation since WWII. Classification-Keywords:

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Bibliographic Info

Paper provided by The Rimini Centre for Economic Analysis in its series Working Paper Series with number 17-08.

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Date of creation: Jan 2008
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Handle: RePEc:rim:rimwps:17-08

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Cited by:
  1. Karim M. Abadir, 2010. "Is the Economic Crisis Over (and Out)?," Professional Reports 02_10, The Rimini Centre for Economic Analysis.

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