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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)

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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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Publisher 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
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Handle: RePEc:wpa:wuwpem:0411018

Note: Type of Document - pdf; pages: 18
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Web page: http://129.3.20.41

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

Find related papers by JEL classification:
C1 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods: General
G12 - Financial Economics - - General Financial Markets - - - Asset Pricing

This paper has been announced in the following NEP Reports:

References listed on IDEAS
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  1. 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. [Downloadable!] (restricted)
  2. Esfandiar Maasoumi, 1993. "A compendium to information theory in economics and econometrics," Econometric Reviews, Taylor and Francis Journals, vol. 12(2), pages 137-181. [Downloadable!] (restricted)
  3. Maasoumi, Esfandiar & Racine, Jeff, 2002. "Entropy and predictability of stock market returns," Journal of Econometrics, Elsevier, vol. 107(1-2), pages 291-312, March. [Downloadable!] (restricted)
  4. M. Hashem Pesaran & Allan Timmermann, 1995. "Predictability of Stock Returns: Robustness and Economic Significance," University of California at San Diego, Economics Working Paper Series 95-19, Department of Economics, UC San Diego.
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  5. Chen, Nai-Fu & Roll, Richard & Ross, Stephen A, 1986. "Economic Forces and the Stock Market," Journal of Business, University of Chicago Press, vol. 59(3), pages 383-403, July. [Downloadable!] (restricted)
  6. Stutzer, Michael, 1995. "A Bayesian approach to diagnosis of asset pricing models," Journal of Econometrics, Elsevier, vol. 68(2), pages 367-397, August. [Downloadable!] (restricted)
  7. 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. [Downloadable!] (restricted)
  8. C. W. Granger & E. Maasoumi & J. Racine, 2004. "A Dependence Metric for Possibly Nonlinear Processes," Journal of Time Series Analysis, Blackwell Publishing, vol. 25(5), pages 649-669, 09. [Downloadable!] (restricted)
  9. 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. [Downloadable!] (restricted)
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