Nonlinear dynamic interrelationships between real activity and stock returns
Markku Lanne and
CREATES Research Papers from Department of Economics and Business Economics, Aarhus University
We explore the differences between the causal and noncausal vector autoregressive (VAR) models in capturing the real activity-stock return-relationship. Unlike the conventional linear VAR model, the noncausal VAR model is capable of accommodating various nonlinear characteristics of the data. In quarterly U.S. data, we find strong evidence in favor of noncausality, and the best causal and noncausal VAR models imply quite different dynamics. In particular, the linear VAR model appears to underestimate the importance of the stock return shock for the real activity, and the real activity shock for the stock return.
Keywords: Noncausal VAR model; non-Gaussianity; generalized forecast error variance decomposition; business cycles; fundamentals. (search for similar items in EconPapers)
JEL-codes: C32 C58 E17 E44 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-ecm, nep-fmk, nep-ger and nep-mac
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Persistent link: https://EconPapers.repec.org/RePEc:aah:create:2015-36
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