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Do macro shocks matter for equities?

Will Dison () and Konstantinos Theodoridis ()
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Will Dison: Bank of England, Postal: Bank of England, Threadneedle Street, London, EC2R 8AH

No 692, Bank of England working papers from Bank of England

Abstract: We investigate the role of macroeconomic shocks in driving equity price dynamics, focusing in particular on the United Kingdom as a small open economy. Using a vector error correction model estimated on 34 macroeconomic and financial time series, we show that shocks to demand, supply, monetary policy and total factor productivity account for a significant proportion of the variation in both UK and US equity prices. In contrast to some of the earlier literature, we find that shocks to total factor productivity play a particularly important role in explaining equity price movements, particularly at longer horizons. Reflecting the international nature of the FTSE All-Share, we find that most of the variation in UK equity prices is accounted for by foreign shocks, even for relatively UK-focused sectors.

Keywords: Asset prices; stock markets; open economy macroeconomics; small open economies; international financial markets; financial forecasting (search for similar items in EconPapers)
JEL-codes: E44 F41 G15 G17 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-fmk and nep-mac
Date: 2017-11-10
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