Does the Real Business Cycle Help Forecast the Financial Cycle?

Fredj Jawadi, Hachmi Ben Ameur, Stephanie Bigou and Alexis Flageollet
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Stephanie Bigou: ICM - Institut du Cerveau = Paris Brain Institute - AP-HP - Assistance publique - Hôpitaux de Paris - INSERM - Institut National de la Santé et de la Recherche Médicale - AP-HP - Hôpital de la Pitié Salpêtrière - AP-HP - Assistance publique - Hôpitaux de Paris - SU - Sorbonne Université - SU - Sorbonne Université - CNRS - Centre National de la Recherche Scientifique
Alexis Flageollet: Natixis Asset Management - SAMS

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Abstract: This study investigates the relationship between the financial market and the real business cycle in the US from February 1987 to March 2016. Using different monthly time-series as proxies for the financial and macroeconomic cycles, we first specify the determinants and then build two indicators to measure the financial and real business cycles based on principal component analysis. We identify not only the main different cycles for each indicator but also measure the duration of the phases for each indicator. Second, we study the relationship between economic and financial indicators per cycle and per phase using a vector autoregressive model. Our findings show that the economic indicator is useful to forecast the financial, and that there exists a significant relationship between the financial and economic cycles that is actively stronger during the "expansion–growth" phase. This result enables investors and policymakers to better forecast the future dynamics of financial sector using the information provided by the analysis of the real business cycle.

Keywords: Financial cycle; Real business cycle; PCA; Connectedness; VAR (search for similar items in EconPapers)
Date: 2021-09-23
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Published in Computational Economics, 2021, 60 (4), pp.1529-1546. ⟨10.1007/s10614-021-10193-8⟩

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Journal Article: Does the Real Business Cycle Help Forecast the Financial Cycle? (2022)
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Persistent link: https://EconPapers.repec.org/RePEc:hal:journl:hal-04478764

DOI: 10.1007/s10614-021-10193-8

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