Are the dynamic linkages between the macroeconomy and asset prices time-varying?

Massimo Guidolin () and Sadayuki Ono

No 2005-056, Working Papers from Federal Reserve Bank of St. Louis

Abstract: We estimate a number of multivariate regime switching VAR models on a long monthly data set for eight variables that include excess stock and bond returns, the real T-bill yield, predictors used in the finance literature (default spread and the dividend yield), and three macroeconomic variables (inflation, real industrial production growth, and a measure of real money growth). Heteroskedasticity may be accounted for by making the covariance matrix a function of the regime. We find evidence of four regimes and of time-varying covariances. We provide evidence that the best in-sample fit is provided by a four state model in which the VAR(1) component fails to be regime-dependent. We interpret this as evidence that the dynamic linkages between financial markets and the macroeconomy have been stable over time. We show that the four-state model can be helpful in forecasting applications and to provide one-step ahead predicted Sharpe ratios.

Keywords: Macroeconomics; Asset pricing (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-for, nep-mac and nep-rmg
Date: 2005
View list of references

Downloads: (external link)
http://research.stlouisfed.org/wp/2005/2005-056.pdf (application/pdf)

Related works:
Journal Article: Are the dynamic linkages between the macroeconomy and asset prices time-varying? (2006)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Ordering information: This working paper can be ordered from

Access Statistics for this paper

More papers in Working Papers from Federal Reserve Bank of St. Louis
Contact information at EDIRC.
Series data maintained by Diane Rosenberger ().