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Interactions between real economic and financial sides of the US economy in a regime-switching environment

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  • Soodabeh Sarafrazi
  • Shawkat Hammoudeh
  • Mehmet Balcilar

Abstract

This objective of this study is to examine the linkages between real (economic) and financial variables in the United States in a regime-switching environment that accounts explicitly for high volatility in the stock market and high stress in financial markets. Since the linearity test shows that the linear model should be rejected, we employ the Markov-switching VECM to examine the same objective using the Bayesian Markov-chain Monte Carlo method. The regime-dependent impulse response function (RDIRF) highlights the increasing importance of the financial sector of the economy during stress periods. The responses and their fluctuations are significantly greater in the high-volatility regime than in the low-volatility regime.

Suggested Citation

  • Soodabeh Sarafrazi & Shawkat Hammoudeh & Mehmet Balcilar, 2015. "Interactions between real economic and financial sides of the US economy in a regime-switching environment," Applied Economics, Taylor & Francis Journals, vol. 47(60), pages 6493-6518, December.
    • Handle: RePEc:taf:applec:v:47:y:2015:i:60:p:6493-6518
    DOI: 10.1080/00036846.2015.1080806
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    Cited by:

    1. Zobia Israr Ahmed & Khalid Mustafa, 2019. "Regime-Dependent Effects on Stock Market Return Dynamics: Evidence from SAARC Countries," Asian Development Policy Review, Asian Economic and Social Society, vol. 7(2), pages 111-132, June.

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