This study investigates the short-term relationship between the UK stock market index (FTSE 100) and six macroeconomic variables during the period 2000-2013 using a multivariate vector autoregression and Granger causality tests. Variance decomposition and impulse response functions are used to measure the shocks of a variable from the other variables and the Granger causality test is used to investigate the lead-lag relationships among these variables.
Introduction
The purpose of this dissertation is to examine the short run dynamic relationship between the UK stock market and several macroeconomic variables which are industrial production, which is a proxy for economic activity, inflation, money supply, short-run and long-run interest rates and personal consumption expenditure for the period 2000-2013 using a vector autoregression (VAR) and Granger causality. This allows us to investigate dynamic interactions and causal relationships among these variables. The choice of variables is based on the fact that these are generally put forward as the most important variables used in specifications. However, it is perhaps not the case that consumption is always included in these specifications. The reason for the inclusion of consumption is we would like to examine the impact of the so-called “wealth effect.”
The period 2000-2013 was chosen due to its recentness, the fact that it covers the global financial crisis and also there seems to be no empirical work carried out during this time period. After significant research we could only come across three papers that examine the relationship between the UK stock market and macroeconomic variables . The methods used in these papers are: Arbitrage Pricing Theory...
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... carried out VAR analysis on US stock returns and macroeconomic variables. Ratanapokoran and Sharma found that, using variance decomposition, that stock prices are somewhat exogenous relative to other variables. This result is arrived at as he finds that 87% of stock price variance is explained by its own shock. He goes on to argue that this finding is a result of stock prices being less dependent on macroeconomic variables and more reliant on themselves. He also finds that macroeconomic variables do not have an effect on stock prices. The major finding of Dhakal and Khandil’s paper is that there is a “direct causal impact” of changes in the money supply on stock prices. They attribute this to changes in the money supply having an influence on the interest rate and inflation whereby the change in interest rates and inflation impacts indirectly on share prices.
The demonstration in this research is simple and the resources are not rich enough. The query to the relevance between the monetary policy and the house bubble still has not been answered. The level of effect the monetary policy made to the financial crisis is still has not been assessed.
The events that unfolded on September 11th and the days that followed also profoundly effected the stock market. It is the purpose of this paper is to examine what happened to both the Dow Jones Industrial Average and the NASDAQ after September 11th and how it is similar to events such as the bombing of Pearl Harbor, the Oklahoma City bombing, and the Gulf War in terms of how the stock market experienced a blow and bounced back after a while.
Despite the increase in volatility, the NASDAQ Composite Index is up by 15.4% for 2007 and by 28% since the last MoneySoft M&A Outlook was published. During the same period, the Dow Jones Industrial Average has moved from 10,705 to 13,930—an increase of 30%, but the market is “wobbly.”
Many economists believe that the money put into computers in the late 1990s’ and early 2000s’ may have impacted the beginning of the 2001 recession, because of the Y2K scare. The aggregate demand for computers, and software sales began pushing the economy into greater debt, because the aggregate supply was greater than the demand, which caused more problems for investors, and how they were spending their money. The recession was not necessarily caused by demand for computers, but it most definitely affected the amount of money that the investors lost, before the recession had officially started. High...
Markets can be efficient even if stock prices exhibit greater volatility than it can be explained by fundamentals such as earnings and dividends. Chapter 11: Potshots at the Efficient –Market Theory and Why They Miss, presents an argument of stock market fluctuations that stock prices show far too much variability to be explained by an efficient-market theory of pricing. It also talks about how one must look to behavioral considerations and to crowd psychology to explain the actual process of price determination in the stock market. I agree with Malkiel’s proclaim about the demise of the efficient-market theory and how it reasons to show that market prices are indeed predictable. Such arguments are exaggerated and the extent to which the stock market is predictable is greatly overstated because market valuation rests on both logical and psychological
The basic model deployed in our study includes other important factors and liquidity variables in addition to mutual fund flows. The model specifies that the return on the stock market is a function of net flows into equity mutual funds, the growth rate of the M2 money supply, changes in the federal funds rate, and growth of earnings per share.
Its main focus is on monetary and other financial markets, determination of interest rates, extent to which monetary policy influences the behavior of the economic units and the implication such influence have in the context of macroeconomics. Hence, monetary policy could be defined as an economics of money supply, prices and interest rate, and their consequences in the economy. It therefore focuses on monetary and other financial markets, determination of interest rate, extent to which these policies, influences the behavior of economic units and the implications the influence has in the macroeconomic context. (Jagdish,
Fama, E.F. and French, K.R. (2004). The Capital Asset Pricing Model: Theory and Evidence. The Journal of Economic Perspectives, 18, 3, 25-46. Retrieved December 2nd, 2011 from jstor.org
In many people's perspectives, the stock market crash in 2008 was nothing positive but a tragedy. Nonetheless, it provoked my interest in the subject of economics, which motivated me to work in the economic-related field in the future.
The wealth effect has helped power the US economy over 1999 and part of 2000, but what happens to the economy if the market tanks? The Federal Reserve has reported that for every $1 billion in increase in the value of equities, Americans will spend an additional $40 million a year. The wealth effect has become a growing concern because more and more people are investing; furthermore the Federal Reserve has very little direct control over stock prices. The numbers are staggering. Since the end of 1995, household stock holdings have doubled to more than $12 trillion dollars. And, for the first time, equities are the most valuable asset of the typical American household, not the home. When it comes to spending money, consumers take all their financial resources into consideration, from their income to their home. When an asset surges in value for a sustained period of time, such as the stock market in the 1990s, people feel flush and are willing to spend some additional money, perhaps by buying a fancy car or by taking a more expensive vacation. A good number of Wall Street analysts blame the wealth effect for today's negative savings rate.
In the study of macroeconomics there are several sub factors that affect the economy either favorably or adversely. One dynamic of macroeconomics is monetary policy. Monetary policy consists of deliberate changes in the money supply to influence interest rates and thus the level of spending in the economy. “The goal of a monetary policy is to achieve and maintain price level stability, full employment and economic growth.” (McConnell & Brue, 2004).
This particular essay will focus on predictability of stock market returns and market efficiency with variety of financial and macroeconomics variables that includes dividend to price ratio, earnings to price ratio, book to market ratio, consumption to wealth ratio, short term interest rates and dividend yield.
In turn everything in the present and the future is judged through the stocks as they hold a high importance in industrialized economies showing the healthiness of said countries economy. As investing discourages consumer spending over all decreases, it lead...
An insight into CCA’s latest fluctuations and position of share prices in most recent 2013 terms. This will include the trends over the previous six months as well as any significant trends in share price f...
Following the trend of economy, it is important to investors to understand that strong economy creates strong stock market. To elaborate further, as stock prices are increased by current and future expectations of earnings, thus without a strong economy it would be difficult for the companies to increase and sustain their earnings (Kong 2013). The economy development is usually calculated using the gross domestic product of a countries. On the other hand, a change is the stock price can also cause a major impact to the consumers and investors directly. Hence, a loss in confidence by investors can cause a downturn in consumer spending in the long term, which will also affect the economy’s output (Aysen 2011). The graph below shows the relationship of stock market price (KLCI) and the GDP of Malaysia in 2009. Thus, it can be concluded that the economy and the stock market has a positive relationship.