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A historical analysis of the US stock price index using empirical mode decomposition over 1791-2015

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  • Tiwari, Aviral Kumar
  • Dar, Arif Billah
  • Bhanja, Niyati
  • Gupta, Rangan

Abstract

In this paper, the dynamics of Standard and Poor's 500 (S&P 500) stock price index is analysed within a time-frequency framework over a monthly period 1791:08-2015:05. Using the Empirical Mode Decomposition technique, the S&P 500 stock price index is divided into different frequencies known as intrinsic mode functions (IMFs) and one residual. The IMFs and the residual are then reconstructed into high frequency, low frequency and trend components using the hierarchical clustering method. Using different measures, it is shown that the low frequency and trend components of stock prices are relatively important drivers of the S&P 500 index. These results are also robust across various subsamples identified based on structural break tests. Therefore, US stock prices have been driven mostly by fundamental laws rooted in economic growth and longterm returns on investment.

Suggested Citation

  • Tiwari, Aviral Kumar & Dar, Arif Billah & Bhanja, Niyati & Gupta, Rangan, 2016. "A historical analysis of the US stock price index using empirical mode decomposition over 1791-2015," Economics Discussion Papers 2016-9, Kiel Institute for the World Economy (IfW Kiel).
    • Handle: RePEc:zbw:ifwedp:20169
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    1. Peter C. B. Phillips & Shuping Shi & Jun Yu, 2015. "Testing For Multiple Bubbles: Historical Episodes Of Exuberance And Collapse In The S&P 500," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 56(4), pages 1043-1078, November.
    2. Zhang, Xun & Lai, K.K. & Wang, Shou-Yang, 2008. "A new approach for crude oil price analysis based on Empirical Mode Decomposition," Energy Economics, Elsevier, vol. 30(3), pages 905-918, May.
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    4. Bangzhu Zhu & Ping Wang & Julien Chevallier & Yiming Wei, 2015. "Carbon Price Analysis Using Empirical Mode Decomposition," Computational Economics, Springer;Society for Computational Economics, vol. 45(2), pages 195-206, February.
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    7. Kumar Tiwari, Aviral & Billah Dar, Arif & Bhanja, Niyati & Shah, Aasif, 2013. "Stock Market Integration in Asian Countries: evidence from Wavelet multiple correlations," Journal of Economic Integration, Center for Economic Integration, Sejong University, vol. 28, pages 441-456.
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    9. Rapach, David & Zhou, Guofu, 2013. "Forecasting Stock Returns," Handbook of Economic Forecasting, in: G. Elliott & C. Granger & A. Timmermann (ed.), Handbook of Economic Forecasting, edition 1, volume 2, chapter 0, pages 328-383, Elsevier.
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    Cited by:

    1. Jihong Xiao & Xuehong Zhu & Chuangxia Huang & Xiaoguang Yang & Fenghua Wen & Meirui Zhong, 2019. "A New Approach for Stock Price Analysis and Prediction Based on SSA and SVM," International Journal of Information Technology & Decision Making (IJITDM), World Scientific Publishing Co. Pte. Ltd., vol. 18(01), pages 287-310, January.
    2. Yue-Jun Zhang & Han Zhang & Rangan Gupta, 2021. "Forecasting the Artificial Intelligence Index Returns: A Hybrid Approach," Working Papers 202182, University of Pretoria, Department of Economics.
    3. Yue-Jun Zhang & Han Zhang & Rangan Gupta, 2023. "A new hybrid method with data-characteristic-driven analysis for artificial intelligence and robotics index return forecasting," Financial Innovation, Springer;Southwestern University of Finance and Economics, vol. 9(1), pages 1-23, December.

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    More about this item

    Keywords

    Empirical Mode Decomposition; stock prices; S&P 500 Index; United States;
    All these keywords.

    JEL classification:

    • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes
    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)

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