Skip to main content

Exploring the finance-real economy link in U.S.: empirical evidence from panel unit root and cointegration analysis

Abstract

The aim of this article is to analyze the relationships between common shocks affecting the real economy and those underlying co-fluctuations in U.S. financial markets. In order to do this, we test for links between these common factors and also use the econometric theory of non-stationary panel data to estimate the relationships. The estimates prove the existence of significant relationships between financial and macroeconomic factors. It is also shown that there are forces pulling U.S. financial markets to move with the real economy, as seen through nearly instantaneous adjustment to a new equilibrium.

This is a preview of subscription content, access via your institution.

References

  1. Bai J, Ng S (2002) Determining the number of factors in approximate factor models. Econometrica 70: 191–221

    Article  Google Scholar 

  2. Bai J, Ng S (2004) A PANIC attack on unit roots and cointegration. Econometrica 72: 1127–1177

    Article  Google Scholar 

  3. Bai J, Ng S (2006) Evaluating latent and observed factors in macroeconomics and finance. J Économ 131: 507–537

    Google Scholar 

  4. Bellone B, Gautier E, Le Coent S (2006) Les marchés financiers anticipent-ils les retournements conjoncturels?. Econom Prévis 172: 83–99

    Google Scholar 

  5. Biacabe JL (2008) Economie américaine : entre fin de cycle et promesses d’innovations. Chambre de Commerce et d’Industrie de Paris

  6. Burns AM, Mitchell WC (1946) Measuring Business Cycles. National Bureau of Economic Research, New York (1946)

  7. Chamberlain G, Rothschild M (1983) Arbitrage, factor structure and mean-variance analysis on large asset markets. Econometrica 51: 1281–1304

    Article  Google Scholar 

  8. Chen N, Roll R, Ross S (1986) Economic forces and the stock market. J Bus 59: 383–403

    Article  Google Scholar 

  9. Croux C, Forni M, Reichlin L (2001) A measure of co-movement for economic variables: theory and empirics. Rev Economic Stat 83: 232–241

    Article  Google Scholar 

  10. Davis S, Haltiwanger J (1992) Gross job creation, gross job destruction, and employment reallocation. Q J Econ 107: 819–863

    Article  Google Scholar 

  11. Dufrenot G, Mignon V, Peguin-Feissolle A (2007) Testing the finance-growth link: is there a difference between developed and developing countries? CEPII Working Paper No 2007-24

  12. Elliott G, Rothenberg TJ, Stock JH (1996) Efficient tests for autoregressive unit root. Econometrica 64: 813–836

    Article  Google Scholar 

  13. Elwell CK, Labonte M, Morrison WM (2007) Is China a threat to the U.S. economy? Congressional Research Service Order Code RL33604

  14. Fama E, French K (1993) Common risk factors in the returns on stocks and bonds. J Fin Econ 33: 3–56

    Article  Google Scholar 

  15. Horvath MTK, Verbugge R (1996) Shocks and Sectoral Interactions: An Empirical Investigation. Department of Economics Stanford University

  16. Johansen S (1988) Statistical analysis of cointegration vectors. J Econ Dyn Control 12: 231–254

    Article  Google Scholar 

  17. Krolzig HM (1997) Markov switching vector autoregressions. Modelling statistical inference and application to business cycle analysis. Springer Verlag, Berlin

    Google Scholar 

  18. Lilien DM (1982) Sectoral shifts and cyclical unemployment. J Polit Econ 90: 777–793

    Article  Google Scholar 

  19. Lin TW, Schimidt J (2002) Economic conditions during the 2001 recession. Washington Economic Trends Research Brief No. 15

  20. Maag E, Merriman DF (2007) Understanding states’ fiscal health during and after the 2001 recession. State Tax Notes Special Report, pp. 359–377

  21. Ng S, Perron P (2001) Lag length selection and the construction of unit root tests with good size and power. Econometrica 69: 1519–1554

    Article  Google Scholar 

  22. Sargent TJ, Wallace N (1982) The real-bills doctrine versus the quantity theory: a reconsideration. J Polit Econ 90: 1212–1236

    Article  Google Scholar 

  23. Stock JH, Watson MH (1988) Testing for common Trends. J Am Stat Assoc 83: 1097–1107

    Article  Google Scholar 

  24. Schwarz G (1978) Estimating the dimension of a model. Ann Stat 6: 461–464

    Article  Google Scholar 

  25. Whalen RC (2008) The subprime crisis: cause, effect and consequences. Networks Financial Institute Indiana State University Policy Brief No. 2008-PB-04

  26. Williamson SD (1989) Restrictions on financial intermediaries and implications for aggregate fluctuations: Canada and the United States 1870–1913. In: NBER Macroeconomics Annual 4:303–350

Download references

Author information

Affiliations

Authors

Corresponding author

Correspondence to Abdou-Aziz Niang.

Rights and permissions

Reprints and Permissions

About this article

Cite this article

Niang, AA., Diagne, A. & Pichery, MC. Exploring the finance-real economy link in U.S.: empirical evidence from panel unit root and cointegration analysis. Empir Econ 40, 253–268 (2011). https://doi.org/10.1007/s00181-010-0395-2

Download citation

Keywords

  • PANIC analysis
  • Panel data
  • Common factors
  • Financial crises
  • U.S.

JEL Classification

  • C5
  • C23
  • D1
  • G1
  • N12