Can macroeconomic variables explain long-term stock market movements? A comparison of the US and Japan

Andreas Humpe, Peter Macmillan

    Research output: Contribution to journalArticlepeer-review

    148 Citations (Scopus)

    Abstract

    Within the framework of a standard discounted value model, we examine
    whether a number of macroeconomic variables influence stock prices in the
    US and Japan. A cointegration analysis is applied in order to model the
    long-term relationship between industrial production, the consumer price
    index, money supply, long-term interest rates and stock prices in the US
    and Japan. For the US, we find the data are consistent with a single
    cointegrating vector, where stock prices are positively related to industrial
    production and negatively related to both the consumer price index and the
    long-term interest rate. We also find an insignificant (although positive)
    relationship between the US stock prices and the money supply. However,
    for the Japanese data, we find two cointegrating vectors. We find for one
    vector that stock prices are influenced positively by industrial production
    and negatively by the money supply. For the second cointegrating vector,
    we find industrial production to be negatively influenced by the consumer
    price index and a long-term interest rate. These contrasting results may be
    due to the slump in the Japanese economy during the 1990s and
    consequent liquidity trap.
    Original languageEnglish
    Pages (from-to)111-119
    Number of pages9
    JournalApplied Financial Economics
    Volume19
    Issue number2
    Early online date14 Jan 2009
    DOIs
    Publication statusPublished - 2009

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