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

Abstract

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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.