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Factor Analysis of Permanent and Transitory Dynamics of the U.S. Economy and the Stock Market

  • Senyuz, Zeynep

We analyze dynamics of the permanent and transitory components of the U.S. economic activity and the stock market obtained by multivariate dynamic factor modeling. We capture asymmetries over the phases of economic and stock market trends and cycles using independent Markov-switching processes. We show that both output and stock prices contain significant transitory components, while consumption and dividends are useful to identify their respective permanent components. The extracted economic trend perfectly predicts all post-war recessions. Our results shed light to the nature of the bilateral predictability of the economy and the stock market. The transitory stock market component signals recessions with an average lead of one quarter, whereas the market trend is correlated with the economic trend with varying lead/lag times.

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File URL: http://mpra.ub.uni-muenchen.de/26855/1/MPRA_paper_26855.pdf
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Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 26855.

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Date of creation: Mar 2009
Date of revision: Mar 2010
Handle: RePEc:pra:mprapa:26855
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