Directional predictability and time-varying spillovers between stock markets and economic cycles

Stelios Bekiros, Syed Jawad Hussain Shahzad, Jose Arreola-Hernandez and Mobeen Ur Rehman
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Syed Jawad Hussain Shahzad: Groupe Sup de Co Montpellier (GSCM) - Montpellier Business School
Jose Arreola-Hernandez: ESC [Rennes] - ESC Rennes School of Business
Mobeen Ur Rehman: Shaheed Zulfiqar Ali Bhutto Institute of Science & Technology, Karachi
Authors registered in the RePEc Author Service: Jose Arreola Hernandez

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Abstract: We examine the nonlinear dependence structure and causal nexus between business cycles, stock market returns and asset return volatility for the US economy. We implement two novel methodologies, namely quantile-on-quantile analysis and cross-quantilogram to account for tail dependence and spillovers across quantile ranges. We find evidence of statistically significant spillover effects from extreme equity market returns and their corresponding volatility to specific stages of business cycles. The sensitivity of returns and volatility to business cycle shocks is only evident for extreme quantiles. These findings indicate the importance of modeling the nonlinearity and tail behaviour when analyzing the relationships between equity markets and business cycles. Financial and monetary policy regulators may use the dynamics of spillover predictability and influence between the equity market returns, their volatility and business cycles to exert some degree of control upon business cycle formation and development.

Keywords: Business cycles; Stock markets; Quantile-on-quantile analysis; Cross-quantilogram; Spillover predictability (search for similar items in EconPapers)
Date: 2018-01
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Citations: View citations in EconPapers (8)

Published in Economic Modelling, 2018, 69, pp.301-312. ⟨10.1016/j.econmod.2017.10.003⟩

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Journal Article: Directional predictability and time-varying spillovers between stock markets and economic cycles (2018)
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Persistent link: https://EconPapers.repec.org/RePEc:hal:journl:hal-01996787

DOI: 10.1016/j.econmod.2017.10.003

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