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The impact of (global) business cycle risk on the German and British stock markets: Evidence from the first age of globalization
Author(s) -
Nitschka Thomas
Publication year - 2013
Publication title -
review of financial economics
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.347
H-Index - 41
eISSN - 1873-5924
pISSN - 1058-3300
DOI - 10.1016/j.rfe.2013.04.003
Subject(s) - globalization , stock (firearms) , business cycle , economics , stock market , german , financial economics , stock market bubble , dividend , monetary economics , market economy , macroeconomics , finance , mechanical engineering , history , horse , biology , engineering , paleontology , archaeology
In the period from 1880 to 1913, time‐varying German and British stock market returns are related to business cycle variables such as the deviation of industrial production from trend. Common British and German business cycle dynamics Granger cause stock returns and explain more than 20% of time variation in one‐year ahead stock market returns. The link between business cycle variables and stock returns is less pronounced in the modern era of financial globalization. A potential explanation for this finding is the fact that during the first globalization period stock indices were dominated by industrial companies and stock prices varied in line with dividends. In the modern era of globalization stock price dynamics predominantly reflect time‐varying risk premia.