Stock prices and GDP in the long run
Annika Alexius () and
Journal of Applied Finance & Banking, 2018, vol. 8, issue 4, 7
Previous studies have documented long run equilibrium relationshipsÂ between either stock prices and labour income or dividends andÂ consumption. In a general equilibrium stochastic growth model, theseÂ variables are related in the long run because they are all driven byÂ the same stochastic trend - the fundamental development of productivity.Â We show that national stock price indices are cointegrated withÂ domestic and foreign GDP in the G7 countries. Higher domestic productivityÂ increase both domestic GDP and domestic stock prices. InÂ the panel, countries with favorable GDP developments also have higherÂ stock prices. The relationship between relative GDP and relative stockÂ prices is stronger for countries with markedly different GDP growthÂ compared to their trading partners.JEL classification numbers: E44; G12Keywords: Stock prices; Long Run Risks; Cointegration
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