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Co-movement of Fundamentals: Structural Changes in the Business Cycle

Stefan Erdorf () and Nicolas Heinrichs ()
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Stefan Erdorf: Graduate School of Risk Management, University of Cologne
Nicolas Heinrichs: Graduate School of Risk Management, University of Cologne

No 01-01, Cologne Graduate School Working Paper Series from Cologne Graduate School in Management, Economics and Social Sciences

Abstract: The co-movement of stocks and of fundamentals changes across the business cycle. Empirical studies have shown that the correlation of stock returns is stronger in crisis. We show that the correlation of fundamentals is the highest during crisis using a large sample of quarterly firm revenues aggregated to industry data from 1969 to 2009. The results of our study indicate that the co-movement of stocks is driven by the co-movement of fundamentals and is not an irrational reaction of markets. Both correlations between industries and the aggregate market and correlations between earnings confirm our findings.

Keywords: correlation; business cycle; fundamentals; revenues; earnings; co-movement of stock returns; crisis; bootstrap; permutation test; industry classification (search for similar items in EconPapers)
JEL-codes: C12 E32 G11 M49 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-fmk
Date: 2010-07, Revised 2010-12
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http://www.cgs.uni-koeln.de/fileadmin/wiso_fak/cgs ... ndamentals_final.pdf Version July 2010 (application/pdf)
http://www.cgs.uni-koeln.de/fileadmin/wiso_fak/cgs ... aper/cgswp_01-01.pdf Version December 2010 (application/pdf)

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