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Interactions between business cycles, stock market cycles and interest rates: the stylised facts


  • Avouyi-Dovi, S.
  • Matheron, J.


In this paper, we study the co-movements between stock market indices and real economic activity over the business cycle in France, Germany, Italy, the United Kingdom and the United States. Working on the premise that there is neither a single definition of the business cycle, nor a single method for studying it, we use two complementary approaches in our analysis. First, we identify the turning points in real economic indicators and stock market indices and determine the extent to which these series co-move, i.e. are regularly and significantly in the same phase of the cycle. Second, we decompose the series studied into a cyclical part and a structural part in order to calculate the correlations between the cyclical components of real economic indicators and excess returns, on the one hand, and the correlations between the structural components of these indicators, on the other. We then analyse the co-movements between three-month interest rates and the cyclical and structural components of real economic and stock market indices. Two main conclusions can be drawn from these different analyses: (i) there does not appear to be a strong dependence between stock prices and the level of real activity in the short term, except in the United States; (ii) in the longer term, real activity and stock prices seem to share the same determinants. However, it seems difficult to clearly identify an impact of asset price movements on the conduct of monetary policy, represented here by three-month money market interest rates. In general, we do not detect a significant relationship between the cyclical components of excess returns and those of money market rates; nor do we find a significant link between the structural components of these variables.

Suggested Citation

  • Avouyi-Dovi, S. & Matheron, J., 2003. "Interactions between business cycles, stock market cycles and interest rates: the stylised facts," Financial Stability Review, Banque de France, issue 3, pages 80-99, November.
  • Handle: RePEc:bfr:fisrev:2003:3:3

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    References listed on IDEAS

    1. Harding, Don & Pagan, Adrian, 2006. "Synchronization of cycles," Journal of Econometrics, Elsevier, vol. 132(1), pages 59-79, May.
    2. James B. Bullard & Eric Schaling, 2002. "Why the Fed should ignore the stock market," Review, Federal Reserve Bank of St. Louis, issue Mar., pages 35-42.
    3. Ben S. Bernanke & Mark Gertler, 2001. "Should Central Banks Respond to Movements in Asset Prices?," American Economic Review, American Economic Association, vol. 91(2), pages 253-257, May.
    4. Lawrence J. Christiano & Terry J. Fitzgerald, 2003. "The Band Pass Filter," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 44(2), pages 435-465, May.
    5. Michael ARTIS & Massimiliano MARCELLINO & Tommaso PROIETTI, 2002. "Dating the Euro Area Business Cycle," Economics Working Papers ECO2002/24, European University Institute.
    6. Paul Cashin & C John McDermott & Alasdair Scott, 1999. "The myth of co-moving commodity prices," Reserve Bank of New Zealand Discussion Paper Series G99/9, Reserve Bank of New Zealand.
    7. Harding, Don & Pagan, Adrian, 2002. "Dissecting the cycle: a methodological investigation," Journal of Monetary Economics, Elsevier, vol. 49(2), pages 365-381, March.
    8. Gerhard Bry & Charlotte Boschan, 1971. "Cyclical Analysis of Time Series: Selected Procedures and Computer Programs," NBER Books, National Bureau of Economic Research, Inc, number bry_71-1, January.
    9. Christophe Croux & Mario Forni & Lucrezia Reichlin, 2001. "A Measure Of Comovement For Economic Variables: Theory And Empirics," The Review of Economics and Statistics, MIT Press, vol. 83(2), pages 232-241, May.
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    Cited by:

    1. Kierzenkowski, R. & Oung, V., 2007. "L’évolution des crédits à l’habitat en France : une grille d’analyse en termes de cycles," Working papers 172, Banque de France.
    2. Fernando Arias Rodríguez & Celina Gaitán Maldonado & Johanna López Velandia, 2014. "Las entidades financieras a lo largo del ciclo de negocios: ¿está el ciclo financiero sincronizado con el ciclo de negocios?," Ensayos sobre Política Económica, Banco de la Republica de Colombia, vol. 32(75), pages 28-40, December.
    3. Ioan Roxana, 2015. "The Co-Movement Connection Between The Gdp And The Main Stock Market Index. The Cases Of Usa And Romania," Annals - Economy Series, Constantin Brancusi University, Faculty of Economics, vol. 6, pages 186-192, December.
    4. Jorge Mario Uribe & Inés María Ulloa & Johanna Perea, 2015. "Reference financial cycle in Colombia," Lecturas de Economía, Universidad de Antioquia, Departamento de Economía, issue 83, pages 33-62, Julio - D.

    More about this item

    JEL classification:

    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy


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