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Directional predictability and time-varying spillovers between stock markets and economic cycles

Author

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  • Stelios Bekiros
  • Syed Jawad Hussain Shahzad
  • Jose Arreola-Hernandez

    (Rennes School of Business)

  • Mobeen Ur Rehman

Abstract

We examine the nonlinear dependence structure and causal nexus between business cycles, stock market returns and asset return volatility for the US economy. We implement two novel methodologies, namely quantile-on-quantile analysis and cross-quantilogram to account for tail dependence and spillovers across quantile ranges. We find evidence of statistically significant spillover effects from extreme equity market returns and their corresponding volatility to specific stages of business cycles. The sensitivity of returns and volatility to business cycle shocks is only evident for extreme quantiles. These findings indicate the importance of modeling the nonlinearity and tail behaviour when analyzing the relationships between equity markets and business cycles. Financial and monetary policy regulators may use the dynamics of spillover predictability and influence between the equity market returns, their volatility and business cycles to exert some degree of control upon business cycle formation and development.

Suggested Citation

  • Stelios Bekiros & Syed Jawad Hussain Shahzad & Jose Arreola-Hernandez & Mobeen Ur Rehman, 2018. "Directional predictability and time-varying spillovers between stock markets and economic cycles," Post-Print hal-01996787, HAL.
  • Handle: RePEc:hal:journl:hal-01996787
    DOI: 10.1016/j.econmod.2017.10.003
    Note: View the original document on HAL open archive server: https://hal.archives-ouvertes.fr/hal-01996787
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    More about this item

    Keywords

    Business cycles; Stock markets; Quantile-on-quantile analysis; Cross-quantilogram; Spillover predictability;

    JEL classification:

    • B26 - Schools of Economic Thought and Methodology - - History of Economic Thought since 1925 - - - Financial Economics
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

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