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Stock prices and GDP in the long run

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  • Annika Alexius
  • Daniel Spang

Abstract

Previous studies have documented long run equilibrium relationships between either stock prices and labour income or dividends and consumption. In a general equilibrium stochastic growth model, these variables are related in the long run because they are all driven by the same stochastic trend - the fundamental development of productivity. We show that national stock price indices are cointegrated with domestic and foreign GDP in the G7 countries. Higher domestic productivity increase both domestic GDP and domestic stock prices. In the panel, countries with favorable GDP developments also have higher stock prices. The relationship between relative GDP and relative stock prices is stronger for countries with markedly different GDP growth compared to their trading partners.JEL classification numbers: E44; G12Keywords: Stock prices; Long Run Risks; Cointegration

Suggested Citation

  • Annika Alexius & Daniel Spang, 2018. "Stock prices and GDP in the long run," Journal of Applied Finance & Banking, SCIENPRESS Ltd, vol. 8(4), pages 1-7.
  • Handle: RePEc:spt:apfiba:v:8:y:2018:i:4:f:8_4_7
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    References listed on IDEAS

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    JEL classification:

    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy

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