Capital Expenditure Decisions in the Private Sector and Their Impact on Uk Stock Market Performance. A Fractional Integration Analysis

Abstract

This paper examines the relationship between capital expenditures (CAPEX) in the private sector and the performance of the UK stock market, specifically focusing on the manufacturing and non-manufacturing sectors. Using quarterly CAPEX data for UK private sector firms and FTSE index data spanning from Q1 1997 to Q1 2024, we employ a robust methodological framework that integrates fractional integration analysis, Granger causality tests, and Continuous Wavelet Transform (CWT). The findings reveal sector-specific dynamics. CAPEX in the non-manufacturing sector exhibits a significant positive causal relationship with FTSE index movements, particularly in short- and medium-term horizons, highlighting its role as a leading indicator of market performance. In contrast, CAPEX in the manufacturing sector demonstrates weaker and less immediate correlations, reflecting its long-term, structural nature and sensitivity to economic cycles. Persistence analysis confirms the long memory behavior of both CAPEX series, with non-manufacturing investments displaying higher stability and predictability. These results underscore the heterogeneity of CAPEX impacts across sectors and emphasize the importance of distinguishing between short-term and long-term investment responses when evaluating stock market dynamics.