Dynamic analysis between the US stock returns and the macroeconomic variables

Abstract

This study investigates the long-term and short-term relationships between the US stock price index (S&P 500) and six macroeconomic variables over the period 1975:1–1999:4. We observe that the stock prices negatively relate to the long-term interest rate, but positively relate to the money supply, industrial production, inflation, the exchange rate and the short-term interest rate. In the Granger causality sense, every macroeconomic variable causes the stock prices in the long-run but not in the short-run. Moreover, these results are also supported by the VDC, i.e. the stock prices are relatively exogenous in relation to other variables because almost 87% of its own variance is explained by its own stock even after 24 months.

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