Testing for cointegration with threshold effect between unemployment and stock prices


ARABACI Ö.

APPLIED ECONOMICS LETTERS, vol.25, no.9, pp.643-647, 2018 (Peer-Reviewed Journal) identifier identifier

  • Publication Type: Article / Article
  • Volume: 25 Issue: 9
  • Publication Date: 2018
  • Doi Number: 10.1080/13504851.2017.1355529
  • Journal Name: APPLIED ECONOMICS LETTERS
  • Journal Indexes: Social Sciences Citation Index, Scopus
  • Page Numbers: pp.643-647
  • Keywords: Unemployment, the stock market, animal spirits, ANIMAL SPIRITS, GREAT RECESSION, MARKET CRASH, SUNSPOTS, CYCLES

Abstract

Under the dominant role of a belief function, Farmer argues that the stock market is the Granger cause of the unemployment rate, which implies that the natural rate hypothesis is an outdated idea. This article provides some new empirical evidence supporting this view using threshold cointegration and asymmetric error correction models. The results show that these models can assess asymmetric dynamics between unemployment and the stock market. Moreover, regime switches of the momentum threshold autoregressive adjustment specification are highly consistent with recessions in the US economy during the last 60years.