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Explaining movements in UK stock prices

Nektarios Aslanidis (), Denise Osborn () and Marianne Sensier ()

No 302, Working Papers from University of Crete, Department of Economics

Abstract: This paper provides evidence on the causes of movements in monthly UK stock prices, examining the role of macroeconomic and financial variables in a nonlinear framework. We allow for time-varying effects through the use of smooth transition models. We find that past changes in the dividend yield are an important transition variable, with current US stock market price changes providing a second nonlinear influence. This model explains the declines in the UK market since 2000, whereas a competing model excluding current US prices does not. The conclusion is that the principal explanation of recent declines in the UK lies in the nonlinear influence of declines in the US, and not the domestic economic environment.

Keywords: Regime-switching models; smooth transition autoregressive models; linearity tests; model evaluation (search for similar items in EconPapers)
JEL-codes: G14 G15 C22 (search for similar items in EconPapers)
Date: 2003-01
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