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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)

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    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.

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    File URL: http://www.cgs.uni-koeln.de/fileadmin/wiso_fak/cgs/pdf/working_paper/CGS_Erdorf_Heinrichs_Fundamentals_final.pdf
    File Function: Version July 2010
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    File URL: http://www.cgs.uni-koeln.de/fileadmin/wiso_fak/cgs/pdf/working_paper/cgswp_01-01.pdf
    File Function: Version December 2010
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    Paper provided by Cologne Graduate School in Management, Economics and Social Sciences in its series Cologne Graduate School Working Paper Series with number 01-01.

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    Date of creation: Jul 2010
    Date of revision: Dec 2010
    Handle: RePEc:cgr:cgsser:01-01
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