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Stock market co-movement, domestic economic policy and the macroeconomic trilemma: the case of the UK (1922–2016)

Published online by Cambridge University Press:  16 July 2019

German Forero-Laverde
German Forero-Laverde*
Affiliation:
Universidad Externado de Colombia
*
German Forero-Laverde, professor and researcher, Universidad Externado de Colombia, Calle 12 # 0-44, Bogotá, 1111711, Colombia; email: german.forero@gmail.com.
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Abstract

This article explores the global cycle hypothesis by testing whether the US stock market serves as an explanatory variable for the evolution of expansions and contractions in the UK stock market from 1922 until 2016. Alternatively, it tests an index that groups the stock markets of advanced economies to identify whether this driving force is international. Second, regarding co-movement with the US, the article explores whether its time-varying nature is contingent on the domestic and international economic policy regimes. I find evidence that there is a strong and contemporaneous co-movement between the US and UK stock markets. Additionally, through a VAR model, I identify that the movements in the UK stock market cause, in the Granger sense, changes in the index for advanced economies up to two years later. Furthermore, in the short-run co-movement between the US and UK stock markets is contingent on the macroeconomic trilemma while, in the long run, both domestic and international policy regimes affect the relationship. A final contribution is the design of a new methodology for describing the evolution of financial time series as risk-adjusted above or below average returns to different time horizons: the Local Bull Bear Indicators (LBBIs).

Keywords

macroeconomic trilemmastock marketco-movementLocal Bull Bear Indicator

JEL classification

N24: Europe: 1913– C14: Semiparametric and Nonparametric Methods: General F33: International Monetary Arrangements and Institutions G15: International Financial Markets N20: General, International, or Comparative E60: General
Type
Articles
Information
Financial History Review , Volume 26 , Issue 3 , December 2019 , pp. 295 - 320
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Copyright
Copyright © European Association for Banking and Financial History e.V. 2019

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Footnotes

An earlier version of this article forms part of my doctoral dissertation developed at Universidad de Barcelona. I am grateful for the generous financial support of Universidad Externado de Colombia and the Colombian Department of Science, Technology and Innovation (COLCIENCIAS), which funded my doctoral research through grant 746-2014. I am also grateful for the valuable comments from the editors, two anonymous reviewers, María Ángeles Pons, Jesús Mur, Yolanda Blasco, María Dolores Gadea, Chris Meissner, Giovanni Federico, Stephen Broadberry, Alan Taylor, Michael Bordo, John Landon-Lane, Eugene White, María José Fuentes-Vásquez and Andrea Montero-Mora. All remaining errors are my own.

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