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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.

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Article provided by Banque de France in its journal Financial stability review.

Volume (Year): (2003)
Issue (Month): 3 (November)
Pages: 80-99

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Handle: RePEc:bfr:fisrev:2003:3:3
Contact details of provider: Postal: Banque de France 31 Rue Croix des Petits Champs LABOLOG - 49-1404 75049 PARIS
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  1. Croux, Christophe & Forni, Mario & Reichlin, Lucrezia, 1999. "A Measure of Comovement for Economic Variables: Theory and Empirics," CEPR Discussion Papers 2339, C.E.P.R. Discussion Papers.
  2. C. John McDermott & Alasdair Scott & Paul Cashin, 1999. "The Myth of Comoving Commodity Prices," IMF Working Papers 99/169, International Monetary Fund.
  3. 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, 05.
  4. Michael Artis & Massimiliano Marcellino & Tommaso Proietti, 2003. "Dating the Euro Area Business Cycle," Working Papers 237, IGIER (Innocenzo Gasparini Institute for Economic Research), Bocconi University.
  5. Harding, Don & Pagan, Adrian, 2002. "Dissecting the cycle: a methodological investigation," Journal of Monetary Economics, Elsevier, vol. 49(2), pages 365-381, March.
  6. Harding, Don & Pagan, Adrian, 2006. "Synchronization of cycles," Journal of Econometrics, Elsevier, vol. 132(1), pages 59-79, May.
  7. 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.
  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, May.
  9. 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.
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