Stock Prices and Economic Fluctuations: A Markov Switching Structural Vector Autoregressive Analysis

20 Pages Posted: 3 Oct 2008

See all articles by Markku Lanne

Markku Lanne

University of Helsinki - Faculty of Social Sciences

Helmut Luetkepohl

European University Institute; CESifo (Center for Economic Studies and Ifo Institute)

Date Written: September 2008

Abstract

The role of expectations for economic fluctuations has received considerable attention in recent business cycle analysis. We exploit Markov regime switching models to identify shocks in cointegrated structural vector autoregressions and investigate different identification schemes for bi-variate systems comprising U.S. stock prices and total factor productivity. The former variable is viewed as reflecting expectations of economic agents about future productivity. It is found that some previously used identification schemes can be rejected in our model setup. The results crucially depend on the measure used for total factor productivity.

Keywords: cointegration, Markov regime switching model, vector error correction model, structural vector autoregression, mixed normal distribution

JEL Classification: C32

Suggested Citation

Lanne, Markku and Luetkepohl, Helmut, Stock Prices and Economic Fluctuations: A Markov Switching Structural Vector Autoregressive Analysis (September 2008). CESifo Working Paper Series No. 2407, Available at SSRN: https://ssrn.com/abstract=1273515

Markku Lanne

University of Helsinki - Faculty of Social Sciences ( email )

P.O. Box 17 (Arkadiankatu 7)
Helsinki, 00014
Finland
+358 2941 28731 (Phone)

HOME PAGE: http://https://blogs.helsinki.fi/lanne/

Helmut Luetkepohl (Contact Author)

European University Institute ( email )

Villa San Paulo
Via della Piazzola 43
I-50133 Firenze
Italy
+39 055 4685 971 (Phone)
+39 055 4685 902 (Fax)

CESifo (Center for Economic Studies and Ifo Institute)

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Munich, DE-81679
Germany

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