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Macroeconomic variables and stock market indices: Asymmetric dynamics in the US and Canada

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  • Bhuiyan, Erfan M.
  • Chowdhury, Murshed

Abstract

While the relationship between stock market returns and macroeconomic variables have been amply examined, there is a gap in the literature when it comes to the relationship between different sector indices and various macroeconomic variables. This study examines how certain macroeconomic variables influence different sectors of the stock market differently in the US and Canada. Using monthly data over the 2000–2018 period, a cointegration analysis is applied to model the relationship between industrial production, money supply, long-term interest rate, and different sector indices. Sectors that have been examined in this study include energy, financials, real estate, industrial, healthcare, consumer discretionary, and consumer staples. Results suggest that there is a stable long-term relationship between the macroeconomic variables used in the study and different sector indices for the US but not for Canada. However, US money supply and interest rate can explain the Canadian stock market. The results suggest important insights for private investors, pension funds, and governments as long-term investors often base their decision to invest in equities on the stated macroeconomic variables.

Suggested Citation

  • Bhuiyan, Erfan M. & Chowdhury, Murshed, 2020. "Macroeconomic variables and stock market indices: Asymmetric dynamics in the US and Canada," The Quarterly Review of Economics and Finance, Elsevier, vol. 77(C), pages 62-74.
    • Handle: RePEc:eee:quaeco:v:77:y:2020:i:c:p:62-74
    DOI: 10.1016/j.qref.2019.10.005
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    More about this item

    Keywords

    Cointegration; Macroeconomic variables; Stock market returns; Sector indices;
    All these keywords.

    JEL classification:

    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • E22 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Investment; Capital; Intangible Capital; Capacity
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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