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Can Money Supply Predict Stock Prices?

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  • Sara Alatiqi
  • Shokoofeh Fazel
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    Abstract

    A positive causal relation from money supply to stock prices is frequently hypothesized by some financial media and financial analysts. The basis of this assertion is an assumed negative causal relation from money supply to interest rates, and a negative causal relation from interest rates to stock prices. In this paper, we argue against a stable causal relation from money supply to stock prices. An empirical analysis, based on cointegration and Granger Causality tests, supports our argument.

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    File URL: http://frank.mtsu.edu/~jee/fall2008/5-MS708-MoneySupplyStockP.pdf
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    Bibliographic Info

    Article provided by Middle Tennessee State University, Business and Economic Research Center in its journal Journal for Economic Educators.

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    Handle: RePEc:mts:jrnlee:200810

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    1. Kraft, John & Kraft, Arthur, 1977. "Determinants of Common Stock Prices: A Time Series Analysis," Journal of Finance, American Finance Association, vol. 32(2), pages 417-25, May.
    2. Gupta, Manak C., 1974. "Money Supply and Stock Prices: A Probabilistic Approach," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 9(01), pages 57-68, January.
    3. Douglas K. Pearce & V. Vance Roley, 1985. "Stock Prices and Economic News," NBER Working Papers 1296, National Bureau of Economic Research, Inc.
    4. Pesando, James E, 1974. "The Supply of Money and Common Stock Prices: Further Observations on the Econometric Evidence," Journal of Finance, American Finance Association, vol. 29(3), pages 909-21, June.
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    Cited by:
    1. Helmut Herwartz & Konstantin A. Kholodilin, 2014. "In‐Sample and Out‐of‐Sample Prediction of stock Market Bubbles: Cross‐Sectional Evidence," Journal of Forecasting, John Wiley & Sons, Ltd., vol. 33(1), pages 15-31, 01.
    2. Chin-Hong Puah & Muzafar Shah Habibullah & Venus Khim-Sen Liew, 2010. "Is money neutral in stock market? The case of Malaysia," Economics Bulletin, AccessEcon, vol. 30(3), pages 1852-1861.
    3. Subhani, Muhammad Imtiaz & Osman, Ms. Amber, 2011. "Monetary Shocks or Real Shocks, Which matters the most for Share Prices," MPRA Paper 34730, University Library of Munich, Germany, revised 2011.

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