The reaction of stock returns to anticipated and unanticipated changes in money: a re-examination of the evidence in the frequency domain

The relationship between money and stock returns is analysed for the 1977-1985 period. Spectral analysis and a VAR (vector autoregressive) model are used in the analysis. The preliminary results suggest a positive relationship between stock returns and money supply along a business cycles and high f...

Full description

Saved in:
Bibliographic Details
Published in:Applied economics 1991-01, Vol.23 (1), p.113-122
Main Authors: Erol, Umit, Balkan, Erol
Format: Article
Language:English
Subjects:
Business cycles
Money supply
Statistical analysis
Stock prices
Stock returns
Citations: Items that this one cites
Items that cite this one
Online Access:Get full text
Tags: Add Tag
No Tags, Be the first to tag this record!
Description
Summary:The relationship between money and stock returns is analysed for the 1977-1985 period. Spectral analysis and a VAR (vector autoregressive) model are used in the analysis. The preliminary results suggest a positive relationship between stock returns and money supply along a business cycles and high frequency cycles. A detailed analysis, however, suggests the spurious character of this observed relationship. The money/stock returns relationship over business cycles can be explained by a contemporaneous adjustment of stock returns and anticipated money in response to business cycle anticipations. The high frequency relationship, on the other hand, can be related to contemporaneous adjustment of stock returns and money anticipations in response to expected inflation in a framework characterized by the anticipation of the Federal Reserve Reaction Function. The empirical results strongly suggest that both stock returns and money anticipations are determined in a forward-looking manner incorporating the information about expected inflation and anticipated production.
ISSN:0003-6846
1466-4283
DOI:10.1080/00036849108841055