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Stock prices and GDP in the long run

Author

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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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    3. Shada Almuwallad, 0000. "Exploring the Dynamics: Granger Causality Between Macroeconomic Variables and Sectoral Stock Prices Before and After the 2008 Financial Crisis: Evidence From The FTSE All-Share Index," Proceedings of Economics and Finance Conferences 14416316, International Institute of Social and Economic Sciences.

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    More about this item

    Keywords

    stock prices; long run risks; cointegration;
    All these keywords.

    JEL classification:

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

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