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Detecting macroeconomic phases in the Dow Jones Industrial Average time series

  • Wong, Jian Cheng
  • Lian, Heng
  • Cheong, Siew Ann
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    In this paper, we perform statistical segmentation and clustering analysis of the Dow Jones Industrial Average (DJI) time series between January 1997 and August 2008. Modeling the index movements and log-index movements as stationary Gaussian processes, we find a total of 116 and 119 statistically stationary segments respectively. These can then be grouped into between five and seven clusters, each representing a different macroeconomic phase. The macroeconomic phases are distinguished primarily by their volatilities. We find that the US economy, as measured by the DJI, spends most of its time in a low-volatility phase and a high-volatility phase. The former can be roughly associated with economic expansion, while the latter contains the economic contraction phase in the standard economic cycle. Both phases are interrupted by a moderate-volatility market correction phase, but extremely-high-volatility market crashes are found mostly within the high-volatility phase. From the temporal distribution of various phases, we see a high-volatility phase from mid-1998 to mid-2003, and another starting mid-2007 (the current global financial crisis). Transitions from the low-volatility phase to the high-volatility phase are preceded by a series of precursor shocks, whereas the transition from the high-volatility phase to the low-volatility phase is preceded by a series of inverted shocks. The time scale for both types of transitions is about a year. We also identify the July 1997 Asian Financial Crisis to be the trigger for the mid-1998 transition, and an unnamed May 2006 market event related to corrections in the Chinese markets to be the trigger for the mid-2007 transition.

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    Article provided by Elsevier in its journal Physica A: Statistical Mechanics and its Applications.

    Volume (Year): 388 (2009)
    Issue (Month): 21 ()
    Pages: 4635-4645

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    Handle: RePEc:eee:phsmap:v:388:y:2009:i:21:p:4635-4645
    Contact details of provider: Web page: http://www.journals.elsevier.com/physica-a-statistical-mechpplications/

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