JEFMS Journal

ABSTRACT:

I revisit the relation between macroeconomic activities and stock prices by selecting the most important macroeconomic variables that are appropriate for analyzing their impact on stock returns. Using vector autogressive models (VAR), combined with co integration analysis and the vector error correction model (VECM) I estimate the explanatory power of each macroeconomic variable on the variations of the stock prices and distinguish the short-run from long-run movements among all key macroeconomic variables. I find that (1) in the short-run macroeconomic variables do not appear help explain changes in stock returns, (2) in the long-run the real interest rate and industrial production are the most important macroeconomic factors, and (3) in the long-term the real economic activity and stock returns Granger-cause each other.

REFERENCES:

1) Samuel B. Bulmash and George William. Trivoli, The Journal of Portfolio Management, Summer 1991, 17 (4) 61-67; DOI: https://doi.org/10.3905/jpm.1991.409351

2) Campbell, J.Y. and Ammer, J. (1993), What Moves the Stock and Bond Markets? A Variance Decomposition for Long‐Term Asset Returns. The Journal of Finance, 48: 3-37. doi:10.1111/j.1540-6261.1993.tb04700.x

3) Chan, L., Karceski, J., & Lakonishok, J. (1998). The Risk and Return from Factors. Journal of Financial and Quantitative Analysis, 33(2), 159-188. doi:10.2307/2331306

4) Chen, N., Roll, R., & Ross, S. (1986). Economic Forces and the Stock Market. The Journal of Business, 59(3), 383-403. From http://www.jstor.org/stable/2352710.

5) Dickinson G. David (2000), Stock market integration and macroeconomic fundamentals: an empirical analysis, 1980-95, Applied Financial Economics, 10:3, 261-276, DOI: 10.1080/096031000331671

6) Fma, E. (1981). Stock Returns, Real Activity, Inflation, and Money. The American Economic Review, 71(4), 545-565, from http://www.jstor.org/stable/1806180.

7) Flannery, Mark Jeffrey and Protopapadakis, Aris, Macroeconomic Factors Do Influence Aggregate Stock Returns. Availa-ble at SSRN: https://ssrn.com/abstract=314261 or http://dx.doi.org/10.2139/ssrn.314261

8) Geske, R., & Roll, R. (1983). The Fiscal and Monetary Linkage Between Stock Returns and Inflation. The Journal of Fi-nance, 38(1), 1-33. doi: 10.2307/2327635.

9) Johansen, S. (1991). Estimation and Hypothesis Testing of Co integration Vectors in Gaussian Vector Autoregressive Models. Econometrica, 59(6), 1551-1580. Doi: 10.2307/2938278.

10) Lee, B. (1992). Causal Relations Among Stock Returns, Interest Rates, Real Activity, and Inflation. The Journal of Finance, 47(4), 1591-1603. doi: 10.2307/2328955.

11) Mukherjee, Tarun& Naka, Atsuyuki. (1995). Dynamic Relations between Macroeconomic Variables and the Japanese Stock Market: An Application of a Vector Error Correction Model. Journal of Financial Research. 18. 223-37. 10.1111/j.1475-6803.1995.tb00563.x.

12) Roll, R., & Ross, S. (1980). An Empirical Investigation of the Arbitrage Pricing Theory. The Journal of Finance, 35(5), 1073-1103. doi: 10.2307/2327087.

13) Søren Johansen, Statistical analysis of co integration vectors, Journal of Economic Dynamics and Control,Volume 12, Is-sues 2–3, 1988, Pages 231-254, ISSN 0165-1889, https://doi.org/10.1016/0165-1889(88)90041-3.

14) Shiller K. Robert, 2000. Irrational Exuberance, Princeton University Press.

15) V. Vance Roley & Rick Troll, 1983. The impact of new economic information on the volatility of short-term interest rates, Economic Review, Federal Reserve Bank of Kansas City, vol. 68(Feb), pages 3-15.

16) Yasushi Hamao, An empirical examination of the Arbitrage Pricing Theory: Using Japanese data, Japan and the World Economy, Volume 1, Issue 1, 1988, Pages 45-61, ISSN 0922-1425, https://doi.org/10.1016/0922-1425 (88)90005-9.

17) Yin-Wong Cheung, Lilian K. Ng, International evidence on the stock market and aggregate economic activity, Journal of Empirical Finance, Volume 5, Issue 3, 1998, Pages 281-296, ISSN 0927-5398, https://doi.org/10.1016/S0927-5398 (97)00025-X.