M1, M2, and the U.S. Equity Exchanges

Duong Nguyen Ali M. Parhizgari ()
Additional contact information
Duong Nguyen Ali M. Parhizgari: Florida International University, Miami

Frontiers in Finance and Economics, 2011, vol. 8, issue 2, 112-135

Abstract: We study the relative positions of M1 and M2 in light of their relationships with four U. S. equity exchanges: S&P500, Dow Jones Industrial, Nasdaq, and Wilshire 5000 composite. It is demonstrated that a long-term equilibrium relationship does indeed exist. Short-run dynamics are also considered and are found to be temporary departures from the long-run equilibrium. Based on a model, which yields robust estimated results and is thus considered well behaved, the direction of causality is established. The model is then put further to test to check the predictive power of the M1 and M2 money aggregates. Based on a set of in- and out-of-sample forecast experiments, the results overwhelmingly indicate that M2 is a better predictive measure and hence a superior indicator than M1. The policy implications of these findings in light of the post financial crisis and the November 2010 US Fed “quantitative easing” policies are discussed.

Keywords: Money supply; M1; M2; Stock return; Granger causality; Error Correction Model; Forecasting. (search for similar items in EconPapers)
JEL-codes: E50 E51 E52 (search for similar items in EconPapers)
Date: 2011
References: Add references at CitEc
Citations:

Downloads: (external link)
http://www.ffe.esc-lille.com/papers/Vol8-2ms342Parhizgari.pdf (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:ffe:journl:v:8:y:2011:i:2:p:112-135

Access Statistics for this article

Frontiers in Finance and Economics is currently edited by Ephraim Clark

More articles in Frontiers in Finance and Economics from SKEMA Business School
Bibliographic data for series maintained by Sophie Bodo ( this e-mail address is bad, please contact ).