Stock market performance and gross domestic product innovations

This paper examines the impact of real (ie, inflation-adjusted) economic activity on the Amman Stock Exchange stock prices for the period 1993–2022 by using the autoregressive distributed lag (ARDL) bounds test. Gross domestic product has a profound effect on stock prices: a 1% increase in real GDP leads to an almost 4% increase in stock price. This result is a strong indication that stock prices follow rather than lead GDP, consistent with a large body of empirical results of the developed countries. Interest rate and inflation rate effects on stock prices are negative and significant in both the short and long run, while domestic credit is not significant in the long run. The interest rate has the strongest impact on stock prices: an increase of 1% leads to a decrease in stock prices of more than 5%. While the Central Bank of Jordan is targeting inflation in the management of its monetary policy, the country’s financial stability will be at stake due to the resulting volatility. The independent variables appear to jointly cause short-term movements in stock prices; all the variables are significant, and the error correction term is very high and significant, confirming the long-term relationship.