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Modified CDR: A Common-Use Proxy for Business Cycle to the Asymmetric Causality between the Stock Returns and Economic Growth Yuan-Ming Lee Kuan-Min Wang T.T.Binh Nguyen 2016/7/12 李源明 王冠閔 阮氐清萍 朝陽科大-2008 研討會 1 Motivation Economic Growth Stock Returns 2016/7/12 朝陽科大-2008 研討會 2 Motivation Causality between the Stock Returns and Economic Growth linear model ? non-linear model ? The strength or weakness of business cycle indicates the growing status of one economy. 2016/7/12 朝陽科大-2008 研討會 3 Motivation The asymmetry of output and economic growth under different business cycler regimes Delong and Summers(1986) Hamilton(1989), Hussey (1992) Beaudry and Koop (1993) Henry et al. (2004) Öcal (2006) 2016/7/12 朝陽科大-2008 研討會 4 Motivation Pedersen and Elmer (2003) found the “business cycle” contains many aspects including most economic activities “business cycle” was applied as a threshold variable of the nonlinear threshold model 2016/7/12 朝陽科大-2008 研討會 5 Motivation The empirical model switched from linear form to nonlinear form is the common way used by researchers. Tong (1978) and Tong and Lim (1980) develop the threshold autoregressive model (TAR). 2016/7/12 朝陽科大-2008 研討會 6 Motivation The threshold vector autoregressive model (TVAR) is adopted when dealing with multivariate models. Tsay(1989, 1998), Hansen (1996, 1999), Weise (1999), Chen et al. (2003), Huang and Yang (2004) and Huang et al.(2005) 2016/7/12 朝陽科大-2008 研討會 7 Motivation Original CDR CDR being the indicator of business cycle which is presented by Beaudry and Koop (1993) 2016/7/12 朝陽科大-2008 研討會 8 Motivation Henry et al. (2004) apply the characteristics of CDR to their empirical study uses CDR as a switching factor of the regime model for creating the nonlinear model. find the significant lead of stock returns over economic growth rates appears during recession, which disappears during expansion. 2016/7/12 朝陽科大-2008 研討會 9 purpose The major aim of this study is bringing CDR into the threshold model making CDR be a proper proxy variable for business cycle as well as become a common-use and simple threshold variable. 2016/7/12 朝陽科大-2008 研討會 10 purpose We explore the correlation between stock returns and economic growth rates MCDR which is used as the threshold variable To create the TVAR model. 2016/7/12 朝陽科大-2008 研討會 11 Model • CDR=0 represents the expansive period of economy • CDR>0 indicates the recessional period of economy. • our new CDR as CDR3 • The CDR3 still maintains the original characteristics of CDR 2016/7/12 朝陽科大-2008 研討會 12 Model CDR3 is no other than the CDR enlarged bilaterally. CDR3 not only retains the original CDR but also quantifies the expansive state that has formerly been zero. 2016/7/12 朝陽科大-2008 研討會 13 Model CDR3 values are normalized by its standard deviation. To avoid the confusions caused by After the CDR3 multiplied by -1 “modified CDR”, aka MCDR: 2016/7/12 朝陽科大-2008 研討會 14 Model Threshold VAR Model –TVAR Model Threshold variable is MCDR (qt-d) t ( A1 1 t i ) I (qt d ) ( A2 2,i t i )(1 I (qt d )) 2016/7/12 朝陽科大-2008 研討會 15 Empirical Results Analyzing the nonlinear relationship between Stock Returns and Economic Growth This study uses the annual data of 25 countries from 1960 to 2003. 2016/7/12 朝陽科大-2008 研討會 16 Empirical Results Unit root test： Table 1 reports the results of unit-root tests. All results of tests show that all variables are I(0). 2016/7/12 朝陽科大-2008 研討會 17 Empirical Results The nonlinear test by Tsay (1998) Table 2 presents the results of nonlinear test for the bivariate model of 25 countries. These results show it is allowable to use the MCDR as a threshold variable and to build the TVAR model. 2016/7/12 朝陽科大-2008 研討會 18 Empirical Results Table 3 reports the estimations of TVAR model The causality between the stock returns and the economic growth rates. 2016/7/12 朝陽科大-2008 研討會 19 Empirical Results During expansion (regime 1) there obviously exists a causal relation between the stock returns and the growth rates in 6 countries; 2016/7/12 朝陽科大-2008 研討會 20 Empirical Results During recession (regime 2) 21 countries display significantly the causal relation between the stock returns and the growth rates none with negative sign. 2016/7/12 朝陽科大-2008 研討會 21 Conclusions In two regime TVAR framework The positive causality between the stock returns and the growth rates occurs mostly during recession. 2016/7/12 朝陽科大-2008 研討會 22 Conclusions In 25 countries used for analysis, the positive relation stock returns and the growth rates is significant in more than 80% countries. This result is very close to the arguments of Mauro (2003) and Henry et al. (2004). 2016/7/12 朝陽科大-2008 研討會 23 Conclusions After modifying partly the CDR equation We obtain MCDR that is applicable to time series data of different countries to create their own threshold model 2016/7/12 朝陽科大-2008 研討會 24 Conclusions These empirical results provide indirect evidences on the discernment of MCDR which is sufficient to become a good proxy for business cycle. 2016/7/12 朝陽科大-2008 研討會 25 Conclusions Four main contributions of MCDR emerge： 1. MCDR is not only the good proxy variable for business cycle but also applicable to data of different countries. 2. MCDR can improve the defect of CDR . 3. MCDR is smoothly adopted into the threshold model 2016/7/12 朝陽科大-2008 研討會 26 Conclusions Main contributions of MCDR emerge： 4. from academic perspective, this study provides an easy and reliable proxy variable for business cycle, MCDR. It has a common use and is able to apply as the threshold variable in threshold model fitted for data of different countries. 2016/7/12 朝陽科大-2008 研討會 27 感謝您的聆聽 Thanks your attention 2016/7/12 朝陽科大-2008 研討會 28