Spillovers between output and stock prices: a wavelet approach

Citation

McMillan D & Tiwari AK (2016) Spillovers between output and stock prices: a wavelet approach. Studies in Economics and Finance, 33 (4), pp. 625-637. https://doi.org/10.1108/SEF-07-2014-0125

Abstract
Purpose  This paper seeks to examine the nature of spillovers between output and stock prices using both a long annual time series spanning 200 years and a shorter but quarterly observed data set.  Design/methodology/approach  The authors’ particular interest is to examine both the time-varying nature of the spillovers and spillovers across the frequency using wavelet analysis.  Findings  The results reveal an interesting detail that is missed when considering spillovers for the raw data. Using annual long run data, spillovers in the raw data are in the order of approximately 10 per cent for stocks to output and 25 per cent for output to stocks. But this increases up to 50 per cent and above (in both directions) when considering different frequencies. Similar results are reported with the quarterly data, although the differences between the raw data and the wavelets are smaller in nature. Finally, output explains more of the variation in stocks than stocks explains in output.  Originality/value  The nature of these results is important for policy-makers, market participants and academics alike, while the use of wavelets provides information across different frequencies.

Keywords
GDP; Spillovers; Wavelets; Stock prices; Time-variation

Journal
Studies in Economics and Finance: Volume 33, Issue 4

People

Professor David McMillan

Professor in Finance, Accounting & Finance