Factor Analysis of Permanent and Transitory Dynamics of the U.S. Economy and the Stock Market

Zeynep Senyuz

MPRA Paper from University Library of Munich, Germany

Abstract: We analyze dynamics of the permanent and transitory components of the U.S. economic activity and the stock market obtained by multivariate dynamic factor modeling. We capture asymmetries over the phases of economic and stock market trends and cycles using independent Markov-switching processes. We show that both output and stock prices contain significant transitory components, while consumption and dividends are useful to identify their respective permanent components. The extracted economic trend perfectly predicts all post-war recessions. Our results shed light to the nature of the bilateral predictability of the economy and the stock market. The transitory stock market component signals recessions with an average lead of one quarter, whereas the market trend is correlated with the economic trend with varying lead/lag times.

Keywords: Business Cycles; Stock Market; Permanent and Transitory Components; Dynamic Factor Markov Switching Models (search for similar items in EconPapers)
JEL-codes: C32 E32 E44 (search for similar items in EconPapers)
Date: 2009-03, Revised 2010-03
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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Related works:
Journal Article: Factor analysis of permanent and transitory dynamics of the US economy and the stock market (2011)
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Persistent link: https://EconPapers.repec.org/RePEc:pra:mprapa:26855

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