**5. Conclusions**

From **Table 5** (upper part), one can see that the coefficients are significantly positive only in the recovery subperiod. This tells that for group A (five Asian emerging countries), the stock return can explain the economic growth only in the recovery period. **Table 5** (middle part) shows that the coefficients are significantly positive only in the depression subperiod, which indicates that for group B (the G7 countries), the stock markets will go down before the

The economic rationale behind this is as follows. Since the stock return and economic growth are positively correlated in the G7 countries, when they enter the depression subperiod, the stock market would go down to reveal the upcoming depressions. When the G7 countries enter the recovery subperiod, their production and consumption will increase. At this time, the G7 countries will place many orders on the Asian emerging markets, and this will help the Asian emerging markets grow and their firms perform well. These outcomes will be reflected by the stock markets in these emerging markets; with more foreign investments from the developed countries, these stock markets will stay in the bull status for a long time. This is why the stock market can significantly explain the economic growth in the recovery subperiod. Although both the Asian emerging markets and the G7 countries are all in the recovery subperiod, the economies will not grow as fast. Moreover, because developed countries tend to invest in high return foreign stock markets, there is no significant relationship between the stock return and

**Table 5** (lower part) reports the estimation result for group C (12 OECD members), the coefficients are significantly positive only in the depression subperiod, same as the result in **Table 5** (middle part). In addition, in the expansionary period, the stock return can significantly explain the economic growth, which is different from the results of other subperiod estima‐ tions. The results in **Table 5** (middle and lower parts) can be used to derive the results of **Table 4** that the stock return can explain the economic growth in both the depression and recovery

The results of **Tables 5** are not quite the same as the result of **Table 4** (the whole sample estimation), which indicates that one cannot apply the conclusion of **Table 4** to every case. Some of the effects may be "cancelled out" by pooling all the countries into one sample.

The empirical findings of this chapter could benefit the corporations, financial companies, as well as regular investors. The contribution of this chapter can be summarized as follows. First, the empirical findings could avoid corporations from misunderstanding the recession period. In the recession period, the government tends to reduce the interest rate and enhance the government spending to stimulate the economy. When making future operation and finance decisions, if the decision maker can seize the chance to adjust the factory size or to raise corporate debts in the recession period or to finance in the expansionary period, it would be beneficial to the corporation. Second, the findings help financial companies or financial supervisors better understand the business cycle. Macroeconomic analyses and business cycles are crucial factors to investment decisions to maximize capital gains and to minimize risks from market fluctuations. Third, the findings help regular investors better understand the business cycle. The business cycle information can help regular investors with medium or long term investment decisions and avoid capital loss from short term fluctuations in the market.

economic growth in the G7 countries in the recovery subperiod.

economies start to grow.

348 Nonlinear Systems - Design, Analysis, Estimation and Control

subperiods.

In this study, the existence of the subperiods of the recession period is observed by examine the business cycle plot of **Figure 1**, this chapter make up this gap by constructing a nonlinear DPDM to investigate the relationship between the stock return and economic growth in the subperiods. The finding of the present chapter can be summarized as follows.

First, the GMM estimation is adopted for the DPDM estimation to avoid possible bias from the OLS estimation. The NCDR proposed by Bradley and Jansen [12] is employed as the switched factor in the model. The empirical result shows that the stock market performance can be a leading indicator for the economic growth, especially in the recession period. This finding is consistent with the findings in previous studies.

Second, the empirical results show that in the whole sample estimation, the stock return can significantly explain the economic growth in the two subperiods of the recession period. In the estimation with different country development levels, it is found that in the Asian emerging markets, the stock return can significantly explain the economic growth only in the recovery period. The reason for this outcome is as follows. Generally speaking, the emerging markets have higher economic growth rates than the most of the developed countries do. When entering the recovery period, the emerging markets can attract more foreign funding into their stock markets. As to the developed countries, the stock return can significantly explain the economic growth only in the depression period. The reason for this result is the following. The developed countries lead the development of the world economy. When the developed countries enter the depression period, the investors will withdraw from the stock markets to avoid the risk of loss, which in turn, causes the stock markets to go down and results in a positive relationship between the depression and the down‐turn stock market. This result indicates that various development levels will have different impact on the relationship between the stock return and economic growth. If one would like to use the stock market information to predict the economic growth, one must first ascertain the country's develop‐ ment status.

