Business Cycle Asymmetry and the Stock Market

THE QUARTERLY REVIEW OF ECONOMICS AND FINANCE, Vol. 35 No. 4, Winter 1995

Posted: 8 Jul 1998

See all articles by Dale L. Domian

Dale L. Domian

York University - School of Administrative Studies

David A. Louton

Bryant University - Department of Finance

Abstract

We present and estimate models of an asymmetric relationship between CRSP stock index returns and the U.S. unemployment rate. Based on the Akaike Information Criterion, conventional linear time series models are improved by allowing asymmetric responses. Our results show that negative stock returns are quickly followed by sharp increases in unemployment, while more gradual unemployment declines follow positive stock returns. According to our forecasting model, the unemployment rate rises by 1.12 percentage points during the 12 months after a 10 percent stock decline. Because macroeconomics forecasters have been unable to reliably predict downturns, these findings may provide a useful contribution.

JEL Classification: E24, E27

Suggested Citation

Domian, Dale L. and Louton, David A., Business Cycle Asymmetry and the Stock Market. THE QUARTERLY REVIEW OF ECONOMICS AND FINANCE, Vol. 35 No. 4, Winter 1995, Available at SSRN: https://ssrn.com/abstract=7232

Dale L. Domian

York University - School of Administrative Studies ( email )

Toronto, Ontario M3J 1P3
Canada
416-736-2100, x20009 (Phone)
416-736-5963 (Fax)

David A. Louton (Contact Author)

Bryant University - Department of Finance ( email )

1150 Douglas Pike
Smithfield, RI 02917
United States
401-232-6343 (Phone)
401-232-6319 (Fax)

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