thesis or dissertation chair
- Song, Keran
My dissertation investigated business cycle effects on US sectoral stock returns.
The first chapter examined the relationship between the business cycle and sectoral stock returns. First, I calculated constant correlation coefficients between the business cycle and sectoral stock returns. Then, I employed the DCC GARCH model to estimate time-varying correlation coefficients for each pair of the business cycle and sectoral stock returns. Finally, I ran regression of sectoral returns on dummy variables designed to capture the four stages of the business cycle. I found that though sectoral stock returns were closely related to the business cycle, they did not share some of its main characteristics.
The second chapter developed two models in order to discuss possible asymmetric business cycle effects on US sectoral stock returns. One was a GARCH model with asymmetric explanatory variables and the other one was an ARCH-M model with asymmetric external regressors. In the second model, square root of conditional variance of the business cycle proxy was characterized as positive or negative risk, depending on the algebraic sign of past innovations driving the business cycle proxy. I found that some sectors changed their cyclicities from expansions to recessions. Negative shocks to business cycles had most power to influence sectoral volatilities. Positive and negative parts of business cycle risk had same effects on some sectors but had opposite effects on other sectors. A general conclusion of both models was that business cycle had stronger effects than own sectoral effects in driving sectoral returns.
The third chapter discussed Chinese business cycle effects on US sectoral stock returns at two horizons. At a monthly horizon, the third lag of Chinese IP growth rate had positive effects on most sectors. The second lag of US IP growth rate had positive effects on almost all sectors. At a quarterly horizon, besides the extensive positive effects of the first lag of Chinese IP growth rate, the third and fourth lags also had effects on some sectors. The US IP growth rate had the same pattern, namely positive first and fourth lag effects and negative third lag effects. Using a 5-year rolling fixed window, I found that these business cycle effects were time-varying. The major changes in parameters resulted from the elimination of quota on textiles by WTO, the terrorist attacks on the US, and the 2007 financial crisis.
- June 19, 2015
- Business Cycle Effects
- GARCH model
- US Sectoral Stock Returns