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The behaviour of stock returns and interest rates over the business cycle in the US and UK

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  • Elena Andreou
  • Rita Desiano
  • Marianne Sensier

Abstract

The paper studies the dynamic behaviour of the conditional mean and volatility of weekly financial variables in relation to the business cycle for the USA and UK economies. The mean US S&P stock returns steadily increases before a recession, then declines approximately six weeks prior to the trough date. Volatility reaches a local maximum 6 weeks prior to the recession, then peaks with the business cycle peak, but falls prior to the trough where the minimum is reached three weeks before. In the UK the FTSE volatility also falls before a recession but reaches its maximum 10 weeks after the peak date and has its minimum after the trough. Similarly, US interest rates are falling before a recession but there is no clear effect in the UK. The volatility of UK interest rates increases before and after the recession date. Overall more leading indicator information is provided by US stock returns and short interest rates whereas the respective UK variables seem to lag the business cycle phases.

Suggested Citation

  • Elena Andreou & Rita Desiano & Marianne Sensier, 2001. "The behaviour of stock returns and interest rates over the business cycle in the US and UK," Applied Economics Letters, Taylor & Francis Journals, vol. 8(4), pages 233-238.
    • Handle: RePEc:taf:apeclt:v:8:y:2001:i:4:p:233-238
    DOI: 10.1080/135048501750103935
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    References listed on IDEAS

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    1. Artis, Michael J & Kontolemis, Zenon G & Osborn, Denise R, 1997. "Business Cycles for G7 and European Countries," The Journal of Business, University of Chicago Press, vol. 70(2), pages 249-279, April.
    2. Whitelaw, Robert F, 1994. "Time Variations and Covariations in the Expectation and Volatility of Stock Market Returns," Journal of Finance, American Finance Association, vol. 49(2), pages 515-541, June.
    3. Gray, Stephen F., 1996. "Modeling the conditional distribution of interest rates as a regime-switching process," Journal of Financial Economics, Elsevier, vol. 42(1), pages 27-62, September.
    4. Hamilton, James D & Gang, Lin, 1996. "Stock Market Volatility and the Business Cycle," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 11(5), pages 573-593, Sept.-Oct.
    5. Lumsdaine, Robin L, 1996. "Consistency and Asymptotic Normality of the Quasi-maximum Likelihood Estimator in IGARCH(1,1) and Covariance Stationary GARCH(1,1) Models," Econometrica, Econometric Society, vol. 64(3), pages 575-596, May.
    6. 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.
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    Cited by:

    1. Gürtler, Marc & Heithecker, Dirk, 2005. "Systematic credit cycle risk of financial collaterals: Modelling and evidence," Working Papers FW15V2, Technische Universität Braunschweig, Institute of Finance.
    2. Jacobsen, Ben & Marquering, Wessel, 2008. "Is it the weather?," Journal of Banking & Finance, Elsevier, vol. 32(4), pages 526-540, April.
    3. Panos Pashardes & Soteroula Hajispyrou, 2002. "Consumer Demand and Welfare under Increasing Block Pricing," University of Cyprus Working Papers in Economics 0207, University of Cyprus Department of Economics.
    4. Hatzipanayotou, Panos & Sajal Lahiri & Michael S.Michael, 2002. "Reforms of Environmental Policies in the presence of Cross-border Pollution and Two-stage Clean-up," Royal Economic Society Annual Conference 2002 97, Royal Economic Society.
    5. Michael Haliassos, 2003. "Stockholding: Recent Lessons from Theory and Computations," Palgrave Macmillan Books, in: Luigi Guiso & Michael Haliassos & Tullio Jappelli (ed.), Stockholding in Europe, chapter 2, pages 30-49, Palgrave Macmillan.

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