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Dynamic interactions between Main Street and Wall Street

2002; Elsevier BV; Volume: 42; Issue: 4 Linguagem: Inglês

10.1016/s1062-9769(01)00118-1

1878-4259

Nikiforos T. Laopodis, Bansi Sawhney,

Complex Systems and Time Series Analysis

The paper examines the time-varying relationship between Main Street and Wall Street (proxied by the Dow–Jones industrial index and the Standard & Poor’s 500 index) using cointegration and error-correction techniques. Preliminary results reveal that each pair of series is bounded by a long-run, common stochastic trend and is characterized by significant short-run interactions. The results point to significant inverse effects of lagged GDP changes on the stock price index fluctuations but not vice versa. A suggested interpretation of this finding is that when the economy is doing well then increases in interest rates are expected which would, in turn, adversely affect the stock market.