Macroeconomic Variables and the Stock Market: A U.S. Study of Their Relationship

Abstract

This thesis focuses on the relationship between expectations of real GDP, inflation, and the stock market. The relationship is important to understand for both regulators, retail investors and institutional investors due to the cointegration of the variables. In order to better understand the relationship, long data samples from the U.S. market are collected and used.
Using both an OLS regression model and a Granger causality model, the results from the OLS model show that changes in CPI expectations had a significant negative effect on Dow Jones Industrial Average, Nasdaq 100, S&P500 and on Gold. This means that an increase in changes in CPI expectations negatively affect the asset classes. Changes in U.S. rgdp expectations had a significant positive effect on XLE, XLF, IYR and on Gold. This means that increases in changes in U.S. rgdp expectations positively affect these asset classes.
Results from the Granger causality model show that US rgdp expectations Granger Causes US CPI expectations and that DJI, S&P500, Nasdaq 100, and NYSE composite Granger causes US rgdp expectations. We can’t see that either US rgdp expectations or US CPI expectations Granger causes the used stock indices in the model (DJI, S&P500, Nasdaq 100, and NYSE composite).
The conclusion is that CPI expectations are negatively impacting the stock market
(OLS) and that the stock market lead expectations of real GDP (Granger). With different findings and including the prior research, the relationship is a complex one and differs depending on data sample, geographical area, statistical model and more.