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International seminar on macroeconomics. Stock returns and the business cycle: a structural approach

Record type: Article

This paper analyzes the relationship between stock returns and real activity from the point of view of a general equilibrium, multicountry model of the business cycle. The empirical evidence suggests that there is a relationship between domestic output growth and domestic stock returns which becomes stronger when foreign influences are considered. We study the properties of a model with two sources of disturbances and three mechanisms of transmission across countries. We show that the model can best reproduce the actual data when technology shocks drive the cycle and when there is a common international component to the shocks. The strength of association between stock returns and output growth depends on how future expected cash flows respond to the disturbances. International linkages emerge because foreign variables contain information about the future path of domestic variables.

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Citation

Canova, Fabio and De Nicolo, Gianni (1995) International seminar on macroeconomics. Stock returns and the business cycle: a structural approach European Economic Review, 39, (5), pp. 981-1015. (doi:10.1016/0014-2921(95)00017-8).

More information

Published date: May 1995
Keywords: transmission, business cycles, international stock returns, financial markets

Identifiers

Local EPrints ID: 32933
URI: http://eprints.soton.ac.uk/id/eprint/32933
ISSN: 0014-2921
PURE UUID: 866caa2a-5b69-42eb-ab73-dc988ba98378

Catalogue record

Date deposited: 11 Dec 2007
Last modified: 17 Jul 2017 15:54

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Contributors

Author: Fabio Canova
Author: Gianni De Nicolo

University divisions


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