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Time variation in the cointegrating relationship between stock prices and economic activity

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  • David McMillan

Abstract

The present paper examines whether there exists a long-run cointegrating relationship between a stock market index and output and interest rates. Moreover, estimation is conducted over the full sample and both a recursive and rolling sample to examine any time variation in the nature of the relationship. The results support evidence of a single cointegrating vector, where stock prices typically exhibit a positive relationship with industrial production and a negative relationship with interest rates. However, there is significant time variation and periods of time where contrary results are observed. As such any model of stock prices needs to account for such time variation

Suggested Citation

  • David McMillan, 2005. "Time variation in the cointegrating relationship between stock prices and economic activity," International Review of Applied Economics, Taylor & Francis Journals, vol. 19(3), pages 359-368.
    • Handle: RePEc:taf:irapec:v:19:y:2005:i:3:p:359-368
    DOI: 10.1080/02692170500119862
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    References listed on IDEAS

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    Cited by:

    1. Khaled Hussainey & Le Khanh Ngoc, 2009. "The impact of macroeconomic indicators on Vietnamese stock prices," Journal of Risk Finance, Emerald Group Publishing, vol. 10(4), pages 321-332, August.
    2. Jalal, Rubia & Gopinathan, R., 2022. "Time-varying and asymmetric impact of exchange rate on oil prices in India: Evidence from a multiple threshold nonlinear ARDL model," Finance Research Letters, Elsevier, vol. 50(C).
    3. Gazi Mainul Hassan & Hisham M. Al refai, 2012. "Can macroeconomic factors explain equity returns in the long run? The case of Jordan," Applied Financial Economics, Taylor & Francis Journals, vol. 22(13), pages 1029-1041, July.
    4. Maria Grazia Miele, 2013. "The effects of capital requirements on real economy: a cointegrated VAR approach for US commercial banks," Working Papers in Public Economics 163, University of Rome La Sapienza, Department of Economics and Law.
    5. Fromentin, Vincent, 2022. "Time-varying causality between stock prices and macroeconomic fundamentals: Connection or disconnection?," Finance Research Letters, Elsevier, vol. 49(C).
    6. Gupta, Rakesh & Yuan, Tian & Roca, Eduardo, 2016. "Linkages between the ADR market and home country macroeconomic fundamentals: Evidence in the context of the BRICs," International Review of Financial Analysis, Elsevier, vol. 45(C), pages 230-239.
    7. R. Gopinathan & S. Raja Sethu Durai, 2019. "Stock market and macroeconomic variables: new evidence from India," Financial Innovation, Springer;Southwestern University of Finance and Economics, vol. 5(1), pages 1-17, December.

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    More about this item

    Keywords

    Stock Prices; cointegration; time variation; JEL Classification: C22; G12;
    All these keywords.

    JEL classification:

    • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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