The stock market and investment in the small and open Norwegian economy

The relationship between the stock market and investment is analyzed by utilizing a multivariate vector autoregressive model, which also includes fundamentals represented by production and the bank interest rate. Two important results appear on the basis of data from the small, open economy of Norway. The financial market has no lead effect on real activity, as neither the stock market nor the credit market can predict future investment or production. On the contrary, current stock returns correlate negatively with lagged growth in investment, and positively with current growth in production. In addition, changes in the bank interest rate have a positive effect on future stock returns, production leads investment positively, and both production and the bank interest rate become exogenous variables in our model. First version received: November 1997/Final version received: October 2000