Stock Market and the Macroeconomy: A Regime Switching Approach

Angelos Kanas and Christos Ioannidis
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Angelos Kanas: Department of Economics - University of Crete, and IACM, FORTH,
Christos Ioannidis: University of Bath, Bath, UK

Economia Internazionale / International Economics, 2007, vol. 60, issue 2, 181-206

Abstract: Allowing for multivariate regime switching, this paper finds evidence that the relation between stock returns, inflation, real activity and interest rates for the US is affected by different exchange rate regimes and different regimes of monetary policy. Fixed exchange rates, and interest rate targeting are associated with a regime in which the joint behavior of the variables is characterized by low volatility, whilst monetary aggregates targeting is associated with a high volatility regime. Both the contemporaneous and the dynamic relations change across regimes. Regime-dependent dynamic effects arise from inflation to stock returns, from interest rates to real activity, from stock returns to real activity and interest rates, and from real activity to interest rates. Dynamic impulse responses also vary across regimes. Finally, there is evidence of regime-dependence in the proxy hypothesis. Mercato azionario e macroeconomia: un approccio regime-switching Questo lavoro evidenzia come negli USA il rapporto tra rendimenti azionari, inflazione, livelli di attività e tassi d’interesse sia influenzato dal regime del tasso di cambio e dalla politica monetaria. Tassi di cambio fissi e strategie basate su un obiettivo di tasso di interesse sono associati ad un comportamento congiunto delle variabili caratterizzato da bassa volatilità, mentre le strategie basate su un obiettivo di aggregati monetari sono associate ad alta volatilità. Sia le relazioni contemporanee che quelle dinamiche cambiano a seconda dei regimi adottati. A seconda del tipo di regime adottato si determinano relazioni dinamiche e effetti di impulso diversi tra le varie variabili sopra menzionate.

Keywords: Regimes; Proxy Hypothesis; Impulse Responses (search for similar items in EconPapers)
JEL-codes: G12 G15 (search for similar items in EconPapers)
Date: 2007
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