Macroeconometrics of stock price fluctuations
Granger (1969) causality tests and Sims' (1980) innovation accounting are used to explain fluctuations in monthly stock returns within a vector autoregressive (VAR) framework. The results show that past money growth, budget deficits, inflation, and both short-term interest rates and long-term interest rates are Granger causal prior to stock returns. These variables also explain a substantial proportion of the forecast error variance of stock returns. It is found that stock returns are related positively to inflation and money growth and negatively to budget deficits, trade deficits, and both short-term interest rates and long-term interest rates, as economic theory would predict. Evidence is provided that indicates that variables such as output, budget deficits and inflation cannot be ignored in an empirical analysis of stock price determination.
Dewan, A. A., & Hayworth, S. C. (1993). Macroeconometrics of stock price fluctuations. Quarterly Journal of Business and Economics, 32(1), 50