CRIEFF Discussion Paper Number 0511
Can
macroeconomic variables explain long term stock market movements? A comparison of the US and Japan.
Andreas Humpe* (CRIEFF, University of St Andrews) and Peter D. Macmillan (University of St Andrews)
Abstract
The main objective of this paper is to examine whether a standard discounted
value model is capable of explaining aggregate long term stock market movements
in the US and Japan. An emphasis on the comparison between the relationships
between selected macroeconomic variables based on the discounted value model
and the stock market will reveal commonalities and differences between the US
and Japanese long term stock market movements. Therefore, a cointegration
analysis is applied to model the long term relationship between industrial
production, the consumer price index, money supply, short as well as long term
interest rates and the stock prices in the US and Japan. The results suggest a
positive relationship between industrial production, CPI and short rates while
the long rates yield a negative coefficient for the US stock market. In Japan,
industrial production has a much smaller positive coefficient as in the US
while the CPI shows a much higher positive coefficient than in the US.
Generally, the results are consistent with the belief that changes in
industrial output are likely to affect current and future corporate cash flows
and have a positive effect on the stock market. The strong negative
relationship between interest rates and the equity market, as suggested by
theory, is not clear in the analysed data set. An
explanation of the different behaviour of the
Japanese stock market, especially in respect to interest rates, industrial
output and the consumer price index, might be given by the boom and bust of the
domestic real estate market and its potentially massive wealth effects as well
as the following bad loan crisis due to a price collapse in housing prices.
JEL Classifications
C22; G12; E44
Keywords
Stock Market Indices, Cointegration, Interest Rates
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