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Co-movement of Fundamentals: Structural Changes in the Business Cycle


  • Stefan Erdorf

    () (Graduate School of Risk Management, University of Cologne)

  • Nicolas Heinrichs

    () (Graduate School of Risk Management, University of Cologne)


The co-movement of stocks and of fundamentals changes across the business cycle. Empirical studies have shown that the correlation of stock returns is stronger in crisis. We show that the correlation of fundamentals is the highest during crisis using a large sample of quarterly firm revenues aggregated to industry data from 1969 to 2009. The results of our study indicate that the co-movement of stocks is driven by the co-movement of fundamentals and is not an irrational reaction of markets. Both correlations between industries and the aggregate market and correlations between earnings confirm our findings.

Suggested Citation

  • Stefan Erdorf & Nicolas Heinrichs, 2010. "Co-movement of Fundamentals: Structural Changes in the Business Cycle," Cologne Graduate School Working Paper Series 01-01, Cologne Graduate School in Management, Economics and Social Sciences, revised Dec 2010.
  • Handle: RePEc:cgr:cgsser:01-01

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    More about this item


    correlation; business cycle; fundamentals; revenues; earnings; co-movement of stock returns; crisis; bootstrap; permutation test; industry classification;

    JEL classification:

    • C12 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Hypothesis Testing: General
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • M49 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting - - - Other

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