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Linear and nonlinear models for the analysis of the relationship between stock market prices and macroeconomic and financial factors

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Author Info

  • Andreia Dionisio

    (University of Evora, Portugal)

  • Rui Menezes

    (ISCTE, Portugal)

  • Diana A. Mendes

    (ISCTE, Portugal)

  • Jacinto Vidigal da Silva

    (University of Evora, Portugal)

Abstract

The main objective of this paper is to assess how mutual information as a measure of global dependence between stock markets and macroeconomic factors can overcome some of the weaknesses of the traditional linear approaches commonly used in this context. One of the advantages of mutual information is that it does not require any prior assumption regarding the specification of a theoretical probability distribution or the specification of the dependence model. This study focuses on the Portuguese stock market where we evaluate the relevance of the macroeconomic and financial variables as determinants of the stock prices behaviour.

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File URL: http://128.118.178.162/eps/em/papers/0411/0411018.pdf
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Bibliographic Info

Paper provided by EconWPA in its series Econometrics with number 0411018.

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Length: 18 pages
Date of creation: 26 Nov 2004
Date of revision:
Handle: RePEc:wpa:wuwpem:0411018

Note: Type of Document - pdf; pages: 18
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Web page: http://128.118.178.162

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Keywords: nonlinear dependence; stock market; financial and macroeconomic factors;

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  1. Hsieh, David A, 1991. " Chaos and Nonlinear Dynamics: Application to Financial Markets," Journal of Finance, American Finance Association, vol. 46(5), pages 1839-77, December.
  2. Fama, Eugene F. & French, Kenneth R., 1989. "Business conditions and expected returns on stocks and bonds," Journal of Financial Economics, Elsevier, vol. 25(1), pages 23-49, November.
  3. Pesaran, M Hashem & Timmermann, Allan, 1995. " Predictability of Stock Returns: Robustness and Economic Significance," Journal of Finance, American Finance Association, vol. 50(4), pages 1201-28, September.
  4. Maasoumi, Esfandiar & Racine, Jeff, 2002. "Entropy and predictability of stock market returns," Journal of Econometrics, Elsevier, vol. 107(1-2), pages 291-312, March.
  5. Chen, Nai-Fu & Roll, Richard & Ross, Stephen A, 1986. "Economic Forces and the Stock Market," The Journal of Business, University of Chicago Press, vol. 59(3), pages 383-403, July.
  6. Haugen, Robert A. & Baker, Nardin L., 1996. "Commonality in the determinants of expected stock returns," Journal of Financial Economics, Elsevier, vol. 41(3), pages 401-439, July.
  7. Stutzer, Michael, 1995. "A Bayesian approach to diagnosis of asset pricing models," Journal of Econometrics, Elsevier, vol. 68(2), pages 367-397, August.
  8. C. W. Granger & E. Maasoumi & J. Racine, 2004. "A Dependence Metric for Possibly Nonlinear Processes," Journal of Time Series Analysis, Wiley Blackwell, vol. 25(5), pages 649-669, 09.
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