Three Essays on Financial Crises and Economic Recessions

Student thesis: Phd


This thesis investigates the dynamics of financial and macroeconomic indicators during and in the aftermath of financial crises and economic recessions. Within the scope of this thesis, I identify three major phenomena: (1) the U.S. slow recovery and the U.K. productivity puzzle and their relationship following the 2007-09 financial crisis; (2) asymmetric co-fluctuations of output and unemployment in the U.S. by integrating Friedman's plucking model and Okun's law; and finally (3) the asymmetric deviation of market prices from efficient prices, which I call inefficient plunges. The first essay, "Slow recovery of output after the 2007-09 financial crisis: U.S. shortfall spillovers and the U.K. productivity puzzle," explores the slow recovery by explaining why output in the U.S. and the U.K. recovered slowly after the recession trough even though unemployment rates returned to pre-crisis levels. To explain this mismatch, we examine the effect of instability in the empirical relationship between output and the unemployment rate on the slow recovery. Using a difference version of Okun's law and a dynamic factor model to estimate the counterfactual, we identify a change in regime in the aftermath of the financial crisis as the main determinant of the slow recovery. Further, by applying a trend-cycle decomposition that allows for time-variation in the parameters, we distinguish between three driving forces of the slow recovery: (1) a declining trend growth, which started in the 1960s; (2) an unprecedented trend deceleration, which began during the financial crisis; and (3) the sluggish cyclical recovery known as hysteresis effects. In the second part of this paper, we answer this question: what would the output recovery in the U.K. have been if there was no slow recovery in the U.S.? Indeed, we demonstrate that spillovers of real activity shortfall from the U.S. explain the productivity puzzle in the U.K. The second essay, "Friedman's plucking model and Okun's law," integrates Friedman's plucking model and the gap version of Okun's law by embedding U.S. output and the unemployment rate in a bivariate unobserved components model with Markov-switching to capture their asymmetric co-fluctuations. We demonstrate that the plucking property of the unemployment rate, through a stable gap version of Okun's law, transmits to U.S. output. The asymmetric bivariate model also deciphers two puzzling dilemmas in trend-cycle decomposition: First, by considering stochastic rather than deterministic trend growth, we identify an unprecedented deceleration in U.S. potential output in the aftermath of the 2007-09 financial crisis. Second, including unemployment as an auxiliary variable in the bivariate model yields a robust estimation of parameters and components with insignificant correlation, which we refer to as correlation irrelevance. In the third essay titled, "Asymmetric Fads, inefficient plunges, and efficient market hypothesis," I define the concept of "inefficient plunges" to characterize the asymmetric deviation of market prices from efficient prices with the aim of examining the efficient market hypothesis. To measure market inefficiency, I present an asymmetric Fads model, which allows for both inefficient plunges in the transitory component and a switching variance in the permanent component by employing a Markov-switching process. Applying the model to the S&P 500 and the FTSE 250 shows that inefficient plunges are deep and transient. Market inefficiency is therefore a regime-dependent and asymmetric phenomenon, meaning that although the U.S. and U.K. stock markets are adequately efficient during normal times, they are far below efficient prices during crises.
Date of Award1 Aug 2023
Original languageEnglish
Awarding Institution
  • The University of Manchester
SupervisorStuart Hyde (Supervisor) & Sungjun Cho (Supervisor)


  • Asymmetric Co-fluctuations
  • Efficient Market Hypothesis
  • Correlation Irrelevance
  • Adaptive Market Hypothesis
  • S&P 500
  • Rational Bubbles
  • FTSE 250
  • Negative Bubbles
  • U.S. and U.K. Stock Markets
  • Unobserved Components Model
  • Asymmetric Fads Model
  • Global Financial Crisis
  • Great Recession
  • Shortfall Spillovers
  • Inefficient Plunges
  • Okun's Law
  • Friedman's Plucking Model
  • Business Cycle Asymmetries
  • Structural Break
  • Dynamic Factor Model (DFM)
  • Trend-Cycle Decomposition
  • U.K. Productivity Puzzle
  • U.S. Slow Recovery
  • Real Output
  • Unemployment Rate

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