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Factor analysis of permanent and transitory dynamics of the US economy and the stock market

✍ Scribed by Zeynep Senyuz

Publisher
John Wiley and Sons
Year
2010
Tongue
English
Weight
407 KB
Volume
26
Category
Article
ISSN
0883-7252

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✦ Synopsis

We analyze dynamics of the permanent and transitory components of the US 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 on 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. Copyright ο›™ 2010 John Wiley & Sons, Ltd.

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