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On the Role of Stock Market for Real Economic Activity

Author

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  • Boriss Siliverstovs
  • Manh Ha Duong

Abstract

In this study we have addressed the relationship between the stock market, the measure of real economic activity (represented by the real GDP), the economic sentiment indicator, and real interest rate for the five European countries: Germany, France, Italy, the Netherlands, and the UK. We find that even when accounting for expectations, represented by the economic sentiment indicator, the stock market has certain predictive content for the real economic activity. At the same time, the relationship between the economic sentiment indicator and the real activity seems to be more articulated than that between the latter variable and the stock market. We also have shown that the developments in the national stock markets are explained by the common factor shared by all of them. The greater relative importance of the economic sentiment indicator for the real GDP when compared to that of the stock market can be traced to the fact that the real economic activity is still shaped more by the domestic shocks rather than the global ones, i.e. those reflected in the stock market.

Suggested Citation

  • Boriss Siliverstovs & Manh Ha Duong, 2006. "On the Role of Stock Market for Real Economic Activity," Discussion Papers of DIW Berlin 599, DIW Berlin, German Institute for Economic Research.
  • Handle: RePEc:diw:diwwpp:dp599
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    File URL: http://www.diw.de/documents/publikationen/73/diw_01.c.44425.de/dp599.pdf
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    References listed on IDEAS

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    4. Jay Choi, Jongmoo & Hauser, Shmuel & Kopecky, Kenneth J., 1999. "Does the stock market predict real activity? Time series evidence from the G-7 countries," Journal of Banking & Finance, Elsevier, vol. 23(12), pages 1771-1792, December.
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    Cited by:

    1. repec:eee:ememar:v:34:y:2018:i:c:p:143-161 is not listed on IDEAS
    2. Abu Nurudeen, 2009. "Does Stock Market Development Raise Economic Growth? Evidence from Nigeria," The Review of Finance and Banking, Academia de Studii Economice din Bucuresti, Romania / Facultatea de Finante, Asigurari, Banci si Burse de Valori / Catedra de Finante, vol. 1(1), pages 015-026, December.
    3. Arshad, Shaista & Rizvi, Syed Aun R., 2015. "The troika of business cycle, efficiency and volatility. An East Asian perspective," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 419(C), pages 158-170.
    4. Shaista Arshad, 2016. "The vicissitudes of stock markets and business cycles: focusing on the OIC region," Macroeconomics and Finance in Emerging Market Economies, Taylor & Francis Journals, vol. 9(1), pages 56-74, March.

    More about this item

    Keywords

    Stock market; real activity; economic sentiment indicator;

    JEL classification:

    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

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