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Beyond Co-Integration: Modelling Co-Movements in Macro finance

Karim M. Abadir () and Gabriel Talmain ()
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Karim M. Abadir: Tanaka Business School, Imperial College London, UK

Working Paper series from Rimini Centre for Economic Analysis

Abstract: Macroeconomic and aggregate financial series share an unconventional type of nonlinear dynamics. Existing techniques (like co-integration) model these dynamics incompletely, hence generating seemingly paradoxical results. To avoid this, we provide a methodology to disentangle the long-run relation between variables from their own dynamics, and illustrate with two applications. First, in the forward-premium puzzle, adding a component quantifying the persistent nonlinear dynamics of exchange rates yields substantial predictability and makes the forward-premium term insignificant. Second, S&P 500 grows in a pattern of momentum followed by reversal, forming long cycles around a trend given by GDP, a stable non-breaking relation since WWII.

Date: 2012-06
New Economics Papers: this item is included in nep-mac
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Persistent link: https://EconPapers.repec.org/RePEc:rim:rimwps:25_12

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