Long-Run Relationship between Economic Growth and Stock Returns: An Empirical Investigation on Canada and the United States

Feridun, Mete (2006): Long-Run Relationship between Economic Growth and Stock Returns: An Empirical Investigation on Canada and the United States. Published in: Ekonomicky Casopis , Vol. 54, No. 6 (September 2006): pp. 584-596.

Abstract

This article examines the long run relationship between economic growth and stock prices for Canada and the United States through cointegration estimation procedure, and it implements the Vector Error Correction Models (VECM) to abstract simultaneously the short- and long-run information in the modeling process. Results from the cointegration tests reveal that economic growth and stock prices share long run equilibrium relationship for both Canada and the U.S. The results from the VECM indicate that for the U.S., causality runs from economic growth to stock prices but not vice versa. However for Canada, the results reveal that there is a bi-directional causality between economic growth and stock prices.

• Item Type: MPRA Paper
• Language: English
• Keywords: stock returns; interest rates; economic growth; Canada; the United tates S
• Subjects: E - Macroeconomics and Monetary Economics > E0 - General

References

[1] ATTA-MENSAH, J. –TKACZ, G. (2001): Predicting Recessions and Booms Using Financial Variables. Canadian Business Economics, 8, No. 3, pp. 30 – 36. [2] BARO, R. (1990): The Stock Market and Investment. Review of Financial Studies, 3, pp. 115 – 131. [3] BENCIVENGA, V. R. –SMITH, B. D. – STARR, R. M. (1996): Equity Markets, Transaction Costs, and Capital Accumulations: An Illustration. The World Bank Review, 10, No. 2, pp. 241 – 265. [4] BERNANKE, B. S. – BLINDER, A. S. (1992): The Federal Funds Rate and the Channels of Monetary Transmission. American Economic Review, 82, No. 4, pp. 901 – 921. [5] BINSWANGER, M. (2000): Stock Market Booms and Real Economic Activity: Is this Time Different? International Review of Economics and Finance, 9, pp. 387 – 415. [6] BINSWANGER, M. (2004): Stock Returns and Real Activity in the G-7 Countries: Did the Relationship Change During the 1980s? The Quarterly Review of Economics and Finance, 44, pp. 237 – 252.