Modelling International Stock Return Cycles

The relationship between stock market rates of return and business cycles is very well depicted by a graph exhibited in Andresen (1987), which we reproduce as Figure 4.1. The figure shows the clear relationship, at the aggregate OECD level, between these two variables. It also illustrates the first of two empirical regularities, discovered in the United States by Fama (1990) and Schwert (1990): (i) rates of return on stocks lead growth in output by 4 to 15 months; and (ii) the link is stronger for yearly, than for quarterly or monthly rates of return. Similar evidence at the international level can be found in Harris and Opler (1990) or Bange and de Bondt (1994).