Do Stock Markets Lead or Lag Macroeconomic Variables? Evidence from Select European Countries

39 Pages Posted: 22 Jul 2019

See all articles by Silvio John Camilleri

Silvio John Camilleri

University of Malta - Department of Banking and Finance - FEMA

Nicolanne Scicluna

University of Malta - Banking and Finance Dept. - FEMA

Ye Bai

University of Nottingham

Date Written: September 2018

Abstract

This study examines the connections between stock prices and key macroeconomic indicators: inflation, industrial production, interest rates, money supply and select interactions between the latter group of variables. Such links are evaluated through vector-autoregressions (VARs) on monthly data spanning over the period 1999-2017, for Belgium, France, Germany, Netherlands and Portugal. We check whether such relations are confirmed across different sub-periods and also adopt a non-parametric approach by using a Pesaran-Timmermann test. We find different contemporaneous and lead-lag relationships between stock prices and the selected variables, although there are variations across countries. VAR models indicate that stock prices significantly lead inflation across all countries during the sample period and in most cases this relationship was positive. In addition, stock prices significantly lead industrial production in four of the sampled countries and these relationships were positive as well. Contrary to long-established finance theories, we did not find numerous significant links between interest rates and stock indices; however the interaction between interest rates and money supply was a leading indicator of stock prices in France, Germany and Portugal.

Keywords: Stock prices, Macroeconomic indicators, Pesaran-Timmermann test, Structural breakpoint tests, Vector autoregression

JEL Classification: G12, G15

Suggested Citation

Camilleri, Silvio John and Scicluna, Nicolanne and Bai, Ye, Do Stock Markets Lead or Lag Macroeconomic Variables? Evidence from Select European Countries (September 2018). Available at SSRN: https://ssrn.com/abstract=3423345 or http://dx.doi.org/10.2139/ssrn.3423345

Silvio John Camilleri (Contact Author)

University of Malta - Department of Banking and Finance - FEMA ( email )

Msida MSD 2080
Msida MSD 06
Malta

Nicolanne Scicluna

University of Malta - Banking and Finance Dept. - FEMA ( email )

Malta

Ye Bai

University of Nottingham ( email )

University Park
Nottingham, NG8 1BB
United Kingdom

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