tailieunhanh - Stock prices and GDP in the long run

Previous studies have documented long run equilibrium relationships between either stock prices and labour income or dividends and consumption. In a general equilibrium stochastic growth model, these variables are related in the long run because they are all driven by the same stochastic trend - the fundamental development of productivity. We show that national stock price indices are cointegrated with domestic and foreign GDP in the G7 countries. Higher domestic productivity increase both domestic GDP and domestic stock prices. In the panel, countries with favorable GDP developments also have higher stock prices. The relationship between relative GDP and relative stock prices is stronger for countries with markedly different GDP growth compared to their trading partners. | Journal of Applied Finance Banking 2018 107-126 ISSN 1792-6580 print version 1792-6599 online Scienpress Ltd 2018 Stock prices and GDP in the long run Annika Alexius1 and Daniel Spang2 Abstract Previous studies have documented long run equilibrium relationships between either stock prices and labour income or dividends and consumption. In a general equilibrium stochastic growth model these variables are related in the long run because they are all driven by the same stochastic trend - the fundamental development of productivity. We show that national stock price indices are cointegrated with domestic and foreign GDP in the G7 countries. Higher domestic productivity increase both domestic GDP and domestic stock prices. In the panel countries with favorable GDP developments also have higher stock prices. The relationship between relative GDP and relative stock prices is stronger for countries with markedly different GDP growth compared to their trading partners. JEL classification numbers E44 G12 Keywords Stock prices Long Run Risks Cointegration 1 Introduction What determines the development of stock prices in the long run Accord 1 Department of Economics Stockholm University. E-mail . 2 The Fourth Swedish National Pension Fund. E-mail daniel-spang@. Article Info Received February 2 2018. Revised March 5 2018. Published online July 1 2018. 108 Stock prices and GDP in the long run ing to the classic Lucas 1978 tree model the price of assets fruit trees in his model is determined solely by the present value of future dividends future fruit production . Hence we expect a link between output and stock prices. A theoretical relationship between stock prices and productivity within a country is derived in Kung and Schmid 2015 who construct a general equilibrium stochastic growth model with endogenous productivity growth and asset prices. Given that consumption dividends labour income output and stock prices are all endogenous .