1 / 11

THE STOCK MARKET AND THE MONEY SUPPLY

THE STOCK MARKET AND THE MONEY SUPPLY. Minhnhat Ho. LITERATURE REVIEW. 1971 – Homa, Kenneth and Jaffee, Dwight “The Supply of Money and Common Stock Prices” Evaluate usefulness of relationship as forecasting tool

gezana
Download Presentation

THE STOCK MARKET AND THE MONEY SUPPLY

An Image/Link below is provided (as is) to download presentation Download Policy: Content on the Website is provided to you AS IS for your information and personal use and may not be sold / licensed / shared on other websites without getting consent from its author. Content is provided to you AS IS for your information and personal use only. Download presentation by click this link. While downloading, if for some reason you are not able to download a presentation, the publisher may have deleted the file from their server. During download, if you can't get a presentation, the file might be deleted by the publisher.

E N D

Presentation Transcript

  1. THE STOCK MARKET AND THE MONEY SUPPLY Minhnhat Ho

  2. LITERATUREREVIEW • 1971 – Homa, Kenneth and Jaffee, Dwight • “The Supply of Money and Common Stock Prices” • Evaluate usefulness of relationship as forecasting tool • Stock price determined by growth rate of dividends (positively related to money supply), riskless interest rate and risk premium (negatively related) • Overall, average level of stock prices is positively related • Used S&P500 along with money supply and growth in forecast model; found significant relationship

  3. 1972 – Hamburger and Kochin • “Money and Stock Prices” • 1974 – Rozeff • “Money and Stock Prices” • Both papers found link between money supply and stock price level, also inferred monetary changes lead stock prices • 1974 – Cooper • “Efficient Capital Markets and the Quantity Theory of Money” – • Stock returns lead money supply changes, not lag as previously thought

  4. 1977 – Rogalski and Vinso • “Stock Returns, Money Supply and the Direction of Causality” • Found problems in previous papers • Money supply data • Stock price series • Information lag • Reinvestigate relationship between money supply and stock prices and establish their dependence • Find direction of causality

  5. Conclusions: • Rate of growth of money supply is incorporated in returns • Stock market efficiency theory holds with respect to monetary information • Causality goes from stock prices to money supply • Propose bidirectional theory of causality (confirmed in 1988 by Hashemzadeh and Taylor) • Change in monetary supply has direct impact on returns from common stocks

  6. 1977 – Kraft, J. and Kraft, A • “Determinants of Common Stock Prices: A time Series Analysis” • Test causal relationship between stock prices and money supply, rate of change of money supply, corporate interest rate , measure of risk • Conclusions: • No causal relationship between money supply, change in money supply, Moody’s AAA corporate bond rate and common stock prices • Further evidence for market efficiency hypothesis (past and current movements in money supply does not influence stock prices)

  7. 1982 – Sorensen, Eric • “Rational Expectations and the Impact of Money upon Stock Prices” • Hypothesized unanticipated change in monetary aggregates have a more dramatic effect on the stock market than the anticipated changes • Results: • Market does not react abnormally to a large percentage of monetary activity either anticipated or unanticipated • Current and future changes in monetary aggregates causes large abnormal stock price returns

  8. 2001 – Muradoglu and Metin • “Is there a long run relationship between stock returns and monetary variables: evidence from an emerging market” • Studied the Turkish stock market, Istanbul Securities Exchange since it’s inception in 1986 • Included exchange rate of several developed countries as independent variable • Conclusions: more mature markets are less influenced by monetary expansion and interest rate

  9. PLAN • Investigate the relationship between common stock market price and money supply using the following time series:

  10. RESULTS

  11. CONCLUSIONS • Money aggregate is not a significant variable in determining the price of common stocks • The corporate bond rate is positively significant, while long term government securities rate is negatively significant • There is no lead or lag effect from the monetary supply

More Related