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A tale of tails: New evidence on the growth-return nexus

Štefan Lyócsa (), Tomáš Výrost and Tomáš Plíhal

Finance Research Letters, 2021, vol. 38, issue C

Abstract: Existing theoretical models predict that asset prices should be strongly related to economic fundamentals. Yet empirical studies usually find a weak correlation. We find that the stock market declines tend to be followed by slower economic growth within two-to-four quarters. However, the relationship is not linear as it tends to be weaker when market prices increase. This result holds for most of 20, mostly developed, countries in our sample. Controlling for the development in interest rates does not change our conclusions. Therefore, we provide new evidence that economic fundamentals and stock prices are related in quantiles.

Keywords: Economic activity; Stock market; Quantile dependence; Cross-quantilogram; Term spread (search for similar items in EconPapers)
JEL-codes: C32 G10 G15 O47 (search for similar items in EconPapers)
Date: 2021
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Persistent link: https://EconPapers.repec.org/RePEc:eee:finlet:v:38:y:2021:i:c:s1544612319310347

DOI: 10.1016/j.frl.2020.101526

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