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Nonlinear dynamic interrelationships between real activity and stock returns

Author

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  • Markku Lanne

    (University of Helsinki and CREATES)

  • Henri Nyberg

    (University of Helsinki and University of Turku)

Abstract

We explore the differences between the causal and noncausal vector autoregressive (VAR) models in capturing the real activity-stock return-relationship. Unlike the conventional linear VAR model, the noncausal VAR model is capable of accommodating various nonlinear characteristics of the data. In quarterly U.S. data, we find strong evidence in favor of noncausality, and the best causal and noncausal VAR models imply quite different dynamics. In particular, the linear VAR model appears to underestimate the importance of the stock return shock for the real activity, and the real activity shock for the stock return.

Suggested Citation

  • Markku Lanne & Henri Nyberg, 2015. "Nonlinear dynamic interrelationships between real activity and stock returns," CREATES Research Papers 2015-36, Department of Economics and Business Economics, Aarhus University.
    • Handle: RePEc:aah:create:2015-36
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    Cited by:

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    2. Lof, Matthijs & Nyberg, Henri, 2017. "Noncausality and the commodity currency hypothesis," Energy Economics, Elsevier, vol. 65(C), pages 424-433.

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    More about this item

    Keywords

    Noncausal VAR model; non-Gaussianity; generalized forecast error variance decomposition; business cycles; fundamentals.;
    All these keywords.

    JEL classification:

    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • C58 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Financial Econometrics
    • E17 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - Forecasting and Simulation: Models and Applications
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy

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