Permanent and transitory components of GDP and stock prices: further analysis
Using the conventional VAR identification approach, Cochrane (1994) finds that substantial amounts of variation in GDP growth and stock returns are due to transitory shocks. Following the common trend decomposition of King, et al. (1991), we show that Cochrane's results depend on the assumption of weak exogeneity of one of the variables with respect to the cointegration vector. When this assumption holds both approaches coincide. If not, the shocks Cochrane called transitory are not totally transitory. In this case, the conventional VAR approach with the assumption of the weak exogeneity may overstate the magnitude of transitory shocks and understate that of permanent shocks. We find that the permanent components of GDP and stock prices are much larger than those estimates of Cochrane, although substantial (but much smaller than in Cochrane (1994)) variations in GDP growth and stock returns are attributed to transitory shocks.
|Date of creation:||May 2007|
|Date of revision:|
|Contact details of provider:|| Postal: |
Phone: +34-91 6249594
Fax: +34-91 6249329
Web page: http://www.eco.uc3m.es
More information through EDIRC
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Barsky, Robert B & De Long, J Bradford, 1993.
"Why Does the Stock Market Fluctuate?,"
The Quarterly Journal of Economics,
MIT Press, vol. 108(2), pages 291-311, May.
- Ribba, Antonio, 1997. "A note on the equivalence of long-run and short-run identifying restrictions in cointegrated systems," Economics Letters, Elsevier, vol. 56(3), pages 273-276, November.
When requesting a correction, please mention this item's handle: RePEc:cte:werepe:we20070525. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: ()
If references are entirely missing, you can add them using this form.