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Effects of Stock Indices of Developed and Emerging Markets on Economic Activity in Colombia: a FAVAR Approach

Author

Listed:
  • Stephanía Mosquera

    (School of Industrial Engineering at the Universidad del Valle)

  • Natalia Restrepo

    (Universidad del Valle)

  • Jorge Uribe

    (Universidad del Valle)

Abstract

We analyze the effect of global financial conditions of developed and emerging economies on economic activity in Colombia. To accomplish this task, we estimate financial conditions indices for the stock markets of developed and emerging countries using principal components analysis. Then, we include the estimated indices as regressors in a traditional vector autoregression (VAR) that includes series of economic activity in Colombia; that is, we carry out a factor-augmented vector autoregression (FAVAR) analysis with one unobservable factor and one observable variable accounting for real economic activity to evaluate the influence of international financial conditions on macroeconomic variables in Colombia. Using monthly data, we find that the stock market conditions of emerging economies have a positive effect on macroeconomic performance in Colombia.

Suggested Citation

  • Stephanía Mosquera & Natalia Restrepo & Jorge Uribe, 2016. "Effects of Stock Indices of Developed and Emerging Markets on Economic Activity in Colombia: a FAVAR Approach," Lecturas de Economía, Universidad de Antioquia, Departamento de Economía, issue 85, pages 155-178, Julio - D.
    • Handle: RePEc:lde:journl:y:2016:i:85:p:155-178
    DOI: 10.17533/udea.le.n85a05
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    More about this item

    Keywords

    stock prices; financial conditions indices; factor-augmented vector autoregression; dynamic factor models;
    All these keywords.

    JEL classification:

    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
    • C38 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Classification Methdos; Cluster Analysis; Principal Components; Factor Analysis
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy

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