A comparison of the statistical properties of financial variables in the USA, UK and Germany over the business cycle

This paper presents business cycle stylized facts for the US, UK and German economies. We examine whether financial variables (interest rates, stock market price indices, dividend yields and monetary aggregates) predict economic activity over the business cycle, and we investigate the nature of any non-linearities in these variables. Leading indicator properties are examined using cross-correlations for both the values of the variables and their volatilities. Our results imply that the most reliable leading indicator across the three countries is the interest rate term structure, although other variables also appear to be useful for specific countries. The volatilities of financial variables may also contain predictive information for production growth as well as production volatility. Non-linearities are uncovered for all financial series, especially in terms of autoregressive conditional heteroscedasticity effects. Strong evidence of mean non-linearity is also found for many financial series and this can be associated with business cycle asymmetries in the mean. This is the case for a number of American and British financial variables, especially interest rates, but the corresponding evidence for Germany is confined largely to the real long-term rate of interest.