The Stock Market, the Real Economy and Contagion

Dirk Baur () and Isaac Miyakawa
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Isaac Miyakawa: Finance Discipline Group, UTS Business School, University of Technology, Sydney

No 179, Working Paper Series from Finance Discipline Group, UTS Business School, University of Technology, Sydney

Abstract: In this paper we analyze the link between stock market performance and macroe conomic performance for a large number of countries. We study the short-run and long-run relationships and find that stock market returns do not coherently predict future macroeconomic changes for the majority of countries, i.e. the estimates vary considerably both across prediction horizons and across countries. Moreover, we test whether the financial and real economy dynamic linkages increased in the financial crisis in 2008 implying “macro-financial” contagion. The crisis-specific analysis of macro-financial linkages broadens the perspective of existing studies of financial contagion. Our findings indicate that the stock market does not merely reflect future economic conditions but also influences them justifying policy responses as witnessed during the 2008 financial and economic crisis.

Keywords: global stock markets; real economic activity; predictive regressions; contagion; financial crises; co-integration (search for similar items in EconPapers)
JEL-codes: C22 C32 E44 G01 G14 G15 G18 (search for similar items in EconPapers)
Pages: 55
Date: 2014-01-01
New Economics Papers: this item is included in nep-fdg, nep-fmk, nep-for and nep-mac
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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