U.S. Economy and Global Stock Markets: Insights from a Distributional Approach

Ping Wu and Dan Zhu

Papers from arXiv.org

Abstract: Financial markets are interconnected, with micro-currents propagating across global markets and shaping economic trends. This paper moves beyond traditional stock market indices to examine cross-sectional return distributions-15 in our empirical application, each representing a distinct global market. To facilitate this analysis, we develop a matrix functional VAR method with interpretable factors extracted from cross-sectional return distributions. Our approach extends the existing framework from modeling a single function to multiple functions, allowing for a richer representation of cross-sectional dependencies. By jointly modeling these distributions with U.S. macroeconomic indicators, we uncover the predictive power of financial market in forecasting macro-economic dynamics. Our findings reveal that U.S. contractionary monetary policy not only lowers global stock returns, as traditionally understood, but also dampens cross-sectional return kurtosis, highlighting an overlooked policy transmission. This framework enables conditional forecasting, equipping policymakers with a flexible tool to assess macro-financial linkages under different economic scenarios.

Date: 2025-11, Revised 2025-11
New Economics Papers: this item is included in nep-ets and nep-mac
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Persistent link: https://EconPapers.repec.org/RePEc:arx:papers:2511.17140

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