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Stock market returns and economic activity: evidence from wavelet analysis

Marco Gallegati ()

Macroeconomics from EconWPA

Abstract: In this paper we investigate the relationship between stock market returns and economic activity by using signal decomposition techniques based on wavelet analysis. In particular, we apply the maximum overlap discrete wavelet transform (MODWT) to the DJIA stock price index and the industrial production index for US over the period 1961:1- 2005:3 and using the definitions of wavelet variance, wavelet correlation and cross-correlations analyze the association as well as the lead/lag relationship between stock prices and industrial production at the different time scales. Our results show that stock market returns tends to lead the level of economic activity but only at the highest scales (lowest frequencies), corresponding to periods of 16 months and longer, and that the periods by which stock returns lead output increase as the wavelet time scale increases.

Keywords: stock market; industrial production; wavelet analysis (search for similar items in EconPapers)
JEL-codes: C32 E44 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-cfn, nep-fmk, nep-mac and nep-rmg
Date: 2005-12-27
Note: Type of Document - pdf; pages: 12
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