Macroeconomic influences on the stock market

The paper studies the dynamic interactions among indicators of economic activity, such as industrial production, interest rate and exchange rate, the performance of the foreign stock market, oil prices, and stock returns to examine whether economic activity movements affect the performance of the stock market for Greece. The empirical evidence suggests that stock returns do not lead changes in real economic activity while the macroeconomic activity and foreign stock market changes explain only partially stock market movements. Oil price changes explain stock price movements and have a negative impact on macroeconomic activity.     

Firms’ fundamentals,macroeconomic variables and quarterly stock prices in the US

This paper modeled the effects of firms’ fundamentals such as total assets and long-term debt and of macroeconomic variables such as unemployment and interest rates on quarterly stock prices of over 3000 US firms in the period 2000–07. The merged CRSP/Compustat database was augmented by macroeconomic variables and comprehensive dynamic models were estimated by maximum likelihood taking into account heterogeneity across firms. Likelihood ratio statistics were developed for sequentially testing hypotheses regarding the adequacy of macroeconomic variables in the models. The main findings were that the estimated coefficients of lagged stock prices in simple dynamic random effects models were in the interval 0.90–0.95. Second, comprehensive dynamic models for stock prices showed that the firms’ earnings per share, total assets, long-term debt, dividends per share, and unemployment and interest rates were significant predictors; there were significant interactions between firms’ long-term debt and interest rates. Finally, implications of the results for corporate policies are discussed.     

The impact of the global business cycle on small open economies: A FAVAR approach for Canada

Building on the growing evidence on the importance of large data sets for empirical macroeconomic modeling, we use a large factor-augmented VAR (FAVAR) model to analyze how global developments affect the Canadian economy. We focus on several sources of shocks, including commodity prices, foreign economic activity, and foreign interest rates, and evaluate the impact of each shock on key Canadian macroeconomic variables. Results indicate that Canada is primarily exposed to shocks to foreign activity and to commodity prices. In contrast, the impact of shocks to global interest rates and global inflation is substantially lower.     

A quantile-copula approach to dependence between financial assets

This article unveils the dependence structure between United States stock prices, crude oil prices, exchange rates, and U.S. interest rates. In particular, we employ linear and nonlinear estimation methods, such as quantile regression and the quantile-copula approach. Over the 1998–2017 period, we find that there is a positive relationship between the dollar value and the S&P 500 stock price, with the exception of the lower and upper tails of the stock return distribution. Further evidence is obtained on the dependence structure between other asset returns. The stock returns are negatively related to oil prices but positively to U.S. interest rates. Our results highlight the way that financial assets are linked, which have implications for risk management and monetary policy.     

Role of credit and monetary policy in determining asset prices: Evidence from emerging market economies

We examine the relative dominance of credit and monetary policy shocks in influencing asset prices in emerging markets. Estimates from panel VAR models for 22 EMEs provide evidence of a significant impact of bank credit on house prices in contrast to trivial impact on stock prices, possibly due to prudential regulations on banks’ exposure to stock markets. Contractionary monetary policy triggers sizeable and persistent decline in stock than housing prices as higher interest rates may render the funding of leverage costlier. Global shocks play an important role in explaining fluctuations in domestic stock prices rather than house prices since the latter class of asset is largely non-tradable across countries.     

Aggregate Investment in South Africa: A Model with Implications for Political Reform

A small macroeconomic model is used as the basis for estimating the determinants of investment in South Africa within a simultaneous equations framework. Investment is highly sensitive to interest rates, relative prices and political instability. The policy implications of such sensitivity are outlined.     

Stock prices and monetary policy shocks: A general equilibrium approach

Empirical literature documents that unexpected changes in the nominal interest rates have a significant effect on real stock prices: a 100-basis point increase in the nominal interest rate is associated with an immediate decrease in broad real stock indices that may range from 2.2 to 9%, followed by a gradual decay as real stock prices revert towards their long-run expected value. We assess the ability of a general equilibrium New Keynesian asset-pricing model to account for these facts. We consider a production economy with elastic labor supply, staggered price and wage setting, as well as time-varying risk aversion through habit formation. We find that the model predicts a stock market response to policy shocks that matches empirical estimates, both qualitatively and quantitatively. Our findings are robust to a range of variations and parametrizations of the model.     

AN EMPIRICAL ANALYSIS OF THE CHANGING ROLE OF THE GERMAN BUNDESBANK AFTER 1983

A cointegrated VAR model describing a small macroeconomic system consisting of money, income, prices, and interest rates is estimated on split sample data before and after 1983. The monetary mechanisms are found to be significantly different. Before 1983 the money supply is controllable and expansion or contraction of money supply has the expected effect on prices, income, and interest rates. After 1983 the conventional mechanisms no longer seem to work. The empirical analysis points to the crucial role of the bond rate in the system, particularly for the more recent period.     

Explaining movements in UK stock prices

We examine movements in aggregate UK stock prices by decomposing the variance of unexpected real stock returns into components due to revisions in expectations of future dividends, discount rates, and the covariance between the two. The contribution of news about future discount rates is about four times that of news about future dividends, with no significant covariance between them. Our analysis of excess returns uncovers a positive covariance between news about dividends and news about real interest rates. Since these two elements have opposite effects on current stock prices, their combined effect is negligible. Persistence in expected returns, as well as predictability, are found to be important in explaining stock price movements.     

Financial information and macroeconomic forecasts

We study the forecasting power of financial variables for macroeconomic variables in 62 countries between 1980 and 2013. We find that financial variables such as credit growth, stock prices, and house prices have considerable predictive power for macroeconomic variables at the one- to four-quarter horizons. A forecasting model that includes financial variables outperforms the World Economic Outlook (WEO) forecasts in up to 85% of our sample countries at the four-quarter horizon. We also find that cross-country panel models produce more accurate out-of-sample forecasts than individual country models.     

Monetary Policy and Asset Prices: A Markov‐Switching DSGE Approach

This paper estimates a Markov‐switching dynamic stochastic general equilibrium model by incorporating stock prices in monetary policy rules in order to identify the Federal Reserve's stance toward them. Based on the data from 1984:Q1 to 2009:Q2, I find that historical evidence of the policy reaction toward stock prices is weak except for the stock market bubble of the 1990s. A counterfactual exercise shows that the rapid growth in stock prices during that period would have been significantly higher if monetary policy had been independent of the stock market. However, unconditional macroeconomic volatility increases with the degree of policy responsiveness toward stock prices. Copyright © 2017 John Wiley & Sons, Ltd.     

An Analysis of the Inward Cross‐Border Mergers and Acquisitions in the U.K.: A Macroeconomic Perspective

The incidence of cross‐border mergers and acquisitions (CBM&As) has accelerated over the past two decades. Yet previous empirical work relating to CBM&As has been confined to firm‐specific factors. This is against the backdrop that researchers have not been able to develop a coherent theory explaining the increasing trends of CBM&As activity. Building on prior studies, this study attempts to extend the few existing studies by using a simple empirical nonlinear framework to analyse the number of CBM&As inflows between 1987 and 2008 into the U.K. from a macroeconomic perspective. The main findings are that the response of the inflow is asymmetric as there is more persistence during stock market booms versus recessions. There are asymmetries with respect to relative prices suggesting that merger inflow activity appears to be higher once the stock prices rise above a threshold level of 8 per cent. Other factors which have significant bearing on CBM&As inflows are the rate of inflation and growth in real GDP.     

Effects of macroeconomic factors on stock prices for BRICS using the variational mode decomposition and quantile method

Based on the variational mode decomposition and quantile model, this article examines the response of BRICS stock prices to shocks of internal and external macroeconomic factors in different market states and over various investment horizons. The results of quantile regression show that the influence of each factor is complex and changeable across countries, market states, and time horizons, thus exhibiting obvious differences. Nevertheless, these coefficients also show a certain degree of similarity. Besides, we find the relationship between stock prices and macroeconomic variables behaved notably differently during the financial crisis in 2008 compared to other periods. Therefore, paying attention to the investment horizon and market state has extraordinary significance for various market participants.     

Detecting speculative bubbles in an IT-intensive stock market

Using a battery of unit root test procedures and cointegration analysis with alternative null hypotheses we find some evidence of speculative bubbles in the Finnish stock market for monthly data on industry portfolio stock prices and returns from the 1990s. When analyzing the time series behavior of stock market prices and returns against the development of certain macroeconomic fundamentals, the bubbles seem to be present especially in the information technology (IT) prices and only during the latter half of the decade. (JEL C22, G12)     

Stock market volatility,the news,and monetary policy

The dynamic relationship linking the volatility of equity prices with “the news” and the expected path for monetary policy is investigated. Previous results that link the impact of the news about real activity to changes in current and future interest rates are employed in developing a positive link between changes in volatility and the news. Empirically, our results uncover a positive and statistically significant response of the CBOE volatility index, VIX, to unanticipated changes in employment, but not to inflation. Hence, agents' expectations for the policy response to news have an important influence on the expected volatility of stock prices. (JEL E44, E52)     

Financial fragility,sovereign default risk and the limits to commercial bank bail-outs

We show that with intertwined weak banks and weak sovereigns, bank recapitalizations become much less effective. We construct a DSGE model with leverage constrained banks lending to firms and holding domestic government bonds. Bond prices reflect endogenously generated sovereign risk. This introduces a negative amplification cycle: after a credit crisis output losses increase more because higher interest rates trigger lower bond prices and subsequent losses at banks. This further tightens bank leverage constraints, and causes interest rates to rise further. Also bank recapitalizations are then much less effective. Recaps involve swaps of newly issued sovereign bonds for bank equity, the new debt increases sovereign debt discounts, leading to capital losses for the banks on their holdings of sovereign debt that (partially) offset the impact of the recapitalization. The favorable macroeconomic effects of bank recaps on the recovery after a financial crisis are correspondingly lower.     

WORLD OUTLOOK

World output, which was strengthening immediately prior to last October, appears to have barely suffered in the short term from the stock market crash. Apart from an early reaction by US consumers - since reversed - demand is proving robust and in early 1988 OECD industrial production is, we estimate, 6 per cent up on year-earlier levels, with GNP more than 4 per cent higher. Indeed such is the strength of activity that the present balance of risk is not that recession is imminent but that inflation may pick up again. In the United States, where activity rates are at their highest level for eight years and unemployment is at a fourteen-year low, monetary policy has been tightened and interest rates are moving higher. The Bundesbank is keen to follow suit and the BoJ is keeping the situation under review. Nevertheless, with wages in most countries still adjusting to the low inflation rates of the last two years, there is little evidence yet that prices are accelerating.
We expect to see world interest rates edging higher in the second half of the year as recorded inflation picks lip. But we believe that underlying inflation remains low and that, even on the assumption that oil prices return to 18 a barrel, OECD consumer price inflation will peak early next year at a little over 4 per cent. Tighter monetary policy is also expected to hold back demand over the next 12 months. Consequently, we expect some weak- ness in output in the first half of next year but discount the possibility of a severe recession. GNP growth in the OECD area is forecast to decline from the 3 per cent rate of 1987–8 to a little over 2 per cent next year and to a sustainable 2½ per cent p.a. over the medium term.     

Jumps,cojumps and macro announcements

We use recently proposed tests to extract jumps and cojumps from three types of assets: stock index futures, bond futures, and exchange rates. We then characterize the dynamics of these discontinuities and informally relate them to US macroeconomic releases before using limited dependent variable models to formally model how news surprises explain (co)jumps. Nonfarm payroll and federal funds target announcements are the most important news across asset classes. Trade balance shocks are important for foreign exchange jumps. We relate the size, frequency and timing of jumps across asset classes to the likely sources of shocks and the relation of asset prices to fundamentals in the respective classes. Copyright © 2010 John Wiley & Sons, Ltd.     

Asymmetric determinants of corporate bond credit spreads in China: Evidence from a nonlinear ARDL model

This study utilizes the nonlinear ARDL (NARDL) model proposed by Shin, Yu, and Greenwood-Nimmo (2014) to quantify the potentially asymmetric transmission of positive and negative changes in each of the possible determinants of industry-level corporate bond credit spreads in China. The determinants we consider include the corresponding industry stock price, China’s stock market volatility, the level and slope of the yield curve (i.e., the interest rate), the industrial production growth rate, and the inflation rate. The empirical results suggest substantial asymmetric effects of these determinants on credit spreads, with the positive changes in the determinants showing larger impacts than the negative changes for most industries we consider. Moreover, the corresponding industry stock prices, the interest rate, and the industrial production growth rate negatively drive the industry credit spreads for many industries. In turn, China’s stock market volatility and the inflation rate positively affect the credit spreads at each industry level. These findings may be helpful to investors, bond issuers and policymakers in understanding the dynamics of credit risks and corporate bond rates at the industry level.     

Macroeconometric model comparison and evaluation techniques: A practical appraisal

This paper examines four model comparison techniques in the setting of an actual large-scale U.S. macroeconomic model. The techniques include formal hypothesis tests, mean squared error analysis, and two new tests based on the complementary conditions that the structural and reduced form disturbances should be orthogonal to the predetermined variables. The latter two tests can be conveniently implemented by regressing either structural residuals or reduced form forecasting errors on a vector of predetermined variables. The empirical example tests restrictions on the simultaneous feedback effects of prices, wage rates, and interest rates.