Measuring real–financial connectedness in the U.S. economy

Erhan Uluceviz and Kamil Yilmaz ()

The North American Journal of Economics and Finance, 2021, vol. 58, issue C

Abstract: We analyze the connectedness between the real and the financial sectors of the U.S. economy. Using the weekly ADS index of the Philadelphia Fed (the widely used business conditions indicator) to represent the real side, we find that during times of financial distress and business cycle turning points, the direction of connectedness runs from the real sector to financial markets. The ADS index is derived from a model containing a measure of term structure along with real variables. Therefore, it might not be the best representative of the real activity used in the connectedness analysis. As an alternative, we derive a real activity index (RAI) from a dynamic factor model of the real sector variables only. The behavior of RAI over time is quite similar to that of the ADS index. When we include RAI to represent the real side, connectedness from the real side to financial markets weakens substantially, while the connectedness from financial markets to the real side becomes more pronounced.

Keywords: Macro-financial linkages; Connectedness; ADS index; Dynamic factor model; Volatility; Vector autoregression; Variance decomposition (search for similar items in EconPapers)
JEL-codes: C38 E37 E44 G10 (search for similar items in EconPapers)
Date: 2021
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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Related works:
Working Paper: Measuring Real-Financial Connectedness in the U.S. Economy (2018)
Working Paper: Measuring Real-Financial Connectedness in the U.S. Economy (2018)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:ecofin:v:58:y:2021:i:c:s1062940821001637

DOI: 10.1016/j.najef.2021.101554

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