XXV Edition

1-2 December 2016"

The Stock Market Reaction to Macroeconomic Forces: the Case of Financial and non-Financial Sectors

Galloppo Giuseppe, Tuscia University
Previati Daniele Angelo, University of Rome III
Fiordelisi Franco, University of Rome III

This paper analyzes the impact of macroeconomic data on G7 stock market area. It is widely believed that the stock market is sensitive to macroeconomic news. There is a widespread belief that the stock market is sensitive to announcements of economic events. Indeed market participants tend to follow closely government releases of economic data. This paper employs Stock market Indexes, to systematically examine stock market reactions, comparing financial and non financial sectors, to a broad list of nominal and real macroeconomic variables. The monthly and quarterly data used in this paper cover the period January 1990 to December 2015. The relation between returns, fundamentals and macroeconomic conditions is of central importance to financial decision making. Investors need to know how returns and fundamentals are affected by changes in macroeconomic conditions for portfolio allocation, risk management and asset pricing purposes. While previous paper focused just on a very small set of variables or on monetary policy action and mainly focusing on the short term effect of macroeconomic data announcements, there exists a large gap in the empirical identification of the state variables determining asset pricing. Indeed, despite the strong association as suggested by the press between movements in stock prices and macroeconomic announcements, there has been relatively scanty hard evidence to support the belief that stock prices respond to general macroeconomic data apart from some types of monetary information. By considering various ways to distinguish between different conditions of the economy, the use of Johansen-Juselius (1990) Multivariate Cointegration and Vector Error Correction Model technique, indicate that there are both long and short run linkages between macroeconomic variable and stock index in each local market. Several variables concerning real economic activity that have received little attention in previous research are shown to have a significant

Area: Financial Stability

Keywords: Macro-economic data, VECM models, Stock market reaction, Business cycle, G7 area

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