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Common trends and common cycles in stock markets

  • Narayan, Paresh Kumar
  • Thuraisamy, Kannan S.

In this paper we examine the role of permanent and transitory shocks in explaining variations in the S&P 500, Dow Jones and the NASDAQ. Our modeling technique involves imposing both common trend and common cycle restrictions in extracting the variance decomposition of shocks. We find that: (1) the three stock price indices are characterized by a common trend and common cycle relationship; and (2) permanent shocks explain the bulk of the variations in stock prices over short horizons.

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File URL: http://www.sciencedirect.com/science/article/pii/S0264999313003179
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Article provided by Elsevier in its journal Economic Modelling.

Volume (Year): 35 (2013)
Issue (Month): C ()
Pages: 472-476

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Handle: RePEc:eee:ecmode:v:35:y:2013:i:c:p:472-476
Contact details of provider: Web page: http://www.elsevier.com/locate/inca/30411

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