Time-varying stock return correlation, news shocks, and business cycles

Norbert Metiu and Esteban Prieto

No 05/2023, Discussion Papers from Deutsche Bundesbank

Abstract: The cross-sectional average of pairwise correlations across stocks traded on the NYSE, AMEX, and Nasdaq is a powerful predictor of U.S. economic activity at a horizon of one to four years. Its predictive ability is on a par with the slope of the yield curve and significantly exceeds that of some other widely used financial indicators. The macroeconomic effects of an innovation to stock return correlation in a vector autoregression are nearly identical to those of a news shock about future productivity. Thus, market-wide changes in return correlation contain information about changes in future technological developments.

Keywords: Business Cycles; News Shock; Stock Market; Uncertainty (search for similar items in EconPapers)
JEL-codes: E32 E44 (search for similar items in EconPapers)
Date: 2023
New Economics Papers: this item is included in nep-fdg
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Persistent link: https://EconPapers.repec.org/RePEc:zbw:bubdps:052023

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