Can Macroeconomic Variables Explain Long Term Stock Market Movements? A Comparison of the US and Japan

CDMA Working Paper No. 07/20

26 Pages Posted: 31 Oct 2007

See all articles by Andreas Humpe

Andreas Humpe

University of St. Andrews

Peter Macmillan

University of St. Andrews - School of Management

Date Written: October 2007

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 a long term interest rate. We also find an insignificant (although positive) relationship between 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.

Keywords: Stock Market Indices, Cointegration, Interest Rates

JEL Classification: C22, G12, E44

Suggested Citation

Humpe, Andreas and Macmillan, Peter, Can Macroeconomic Variables Explain Long Term Stock Market Movements? A Comparison of the US and Japan (October 2007). CDMA Working Paper No. 07/20, Available at SSRN: https://ssrn.com/abstract=1026219 or http://dx.doi.org/10.2139/ssrn.1026219

Andreas Humpe

University of St. Andrews ( email )

North St
Saint Andrews, Fife KY16 9AJ

Peter Macmillan (Contact Author)

University of St. Andrews - School of Management ( email )

The Gateway
Gateway
St. Andrews, Fife KY16 9SS
United Kingdom

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
1,295
Abstract Views
5,901
rank
17,642
PlumX Metrics