Distilling Co-Movements from Persistent Macro and Financial Series

40 Pages Posted: 19 Oct 2005

See all articles by Karim M. Abadir

Karim M. Abadir

Imperial College Business School

Gabriel Talmain

University of York - Department of Economics and Related Studies

Date Written: September 2005

Abstract

We provide a methodology to disentangle the long-run relation between variables from their own dynamics. Macroeconomic and aggregate financial series have a high degree of inertia. If this persistence is not properly accounted for, spurious correlations will give rise to paradoxes. Our procedure shows that the Uncovered Interest Parity (UIP) puzzle evaporates when the dynamics are properly modelled: the forward premium loses all the predictive power that it seemed to have. We also show how the stock market grows in long cycles around a trend given by GDP, in a stable relation that does not break.

Keywords: ACF-based GLS procedure, Autocorrelation Function, Long memory, Nonlinearities, Uncovered Interest Parity anomaly

JEL Classification: E37

Suggested Citation

Abadir, Karim M. and Talmain, Gabriel, Distilling Co-Movements from Persistent Macro and Financial Series (September 2005). ECB Working Paper No. 525. Available at SSRN: https://ssrn.com/abstract=800504

Karim M. Abadir (Contact Author)

Imperial College Business School ( email )

South Kensington Campus
Exhibition Road
London SW7 2AZ, SW7 2AZ
United Kingdom

HOME PAGE: http://www3.imperial.ac.uk/portal/page?_pageid=61,629646&_dad=portallive&_schema=PORTALLIVE

Gabriel Talmain

University of York - Department of Economics and Related Studies ( email )

Heslington
York, YO1 5DD
United Kingdom

Register to save articles to
your library

Register

Paper statistics

Downloads
109
Abstract Views
704
rank
251,898
PlumX Metrics