Specific Signal Analysis of the Nikkei and Dow Jones Industrial Indices Using Fourier Series Post-1985 Plaza Agreement

Abstract

This study investigates the US and Japanese stock market developments before and after the 1985 Plaza Agreement, aiming to understand the impacts on market stability. We conduct a comparative analysis of the time series of monthly returns for the Nikkei Index and Dow Jones Industrial Index using Fourier series approximation. Our research question centers on how these markets have responded to global financial crises and the role of the Plaza Agreement in shaping these responses. We found that the US stock market generally behaved in a typical manner—except during two global financial crises—with little observable difference before and after the agreement. In contrast, the Japanese stock market faced persistent instabilities. A key contribution of this research is the introduction and novel application of Z-test crisis indices, specifically designed to detect deviations from typical market trajectories during global crises. Our findings reveal distinct responses from the US and Japan to crises and highlight the potential of our methodology as an efficient tool for crisis detection and response. The CI_odd index, in particular, serves as a sensitive and powerful warning detector for global financial crises common to both markets, and it uniquely identifies sensitive responses to unstable market conditions, especially in Japan. These insights have practical implications for policymakers and market analysts in strengthening financial market stability and contribute to the advancement of crisis detection methodologies in financial studies.