The stock market over the business cycle

2021 ◽  
pp. 126-141
Author(s):  
Jesper Rangvid
Keyword(s):  
Monetary Policy ◽  
Stock Market ◽  
Business Cycle ◽  
Interest Rates ◽  
Stock Prices ◽  
Stock Price ◽  
Academic Research ◽  
Central Banks ◽  
Discount Rates ◽  
The Business Cycle

This chapter describes how the stock market relates to the business cycle. Stocks do badly during recessions and excellently during expansions. Earnings of firms drop during recessions. Stock prices drop as well, whereas dividends do not. This means that the stock-price dividend multiple contracts during recessions. If stock prices drop by more than dividends, it must be because investors have increased their expectations of future discount rates and/or lowered their expectations to future dividend/earnings growth. The chapter discusses the academic research on this issue. The chapter also shows that bonds do better than stocks during recessions. This has not least to do with the fact that central banks lower the monetary policy rate during recessions.Lower interest rates lead to higher bond prices, causing bonds to perform well during recessions.

Monetary policy and the business cycle

2021 ◽  
pp. 142-154
Author(s):  
Jesper Rangvid
Keyword(s):  
Monetary Policy ◽  
Stock Market ◽  
Business Cycle ◽  
Interest Rates ◽  
Stock Prices ◽  
House Prices ◽  
Policy Instruments ◽  
Central Banks ◽  
Consumer Prices ◽  
The Business Cycle

This chapter describes monetary policy. Monetary policy aims at keeping consumer prices stable and the financial system well-functioning. Monetary policy is conducted by central banks. To achieve their goals, central banks use their monetary policy instruments, the most important of which is the monetary policy rate. By changing the short interest rate, central banks influence financial markets, first via its influence over other interest rates (longer interest rates on government bonds, interest rates on commercial debt, mortgage rates, etc.) and then via spill-overs to other asset prices, such as stock prices, exchange rates, house prices, etc. Changes in monetary policy thereby influence the business cycle and its future path. When monetary policy influences the business cycle, and the business cycle influences the stock market, there are good reasons to believe that monetary policy also influences the stock market.

Monetary policy, interest rates and stock markets

2021 ◽  
pp. 155-171
Author(s):  
Jesper Rangvid
Keyword(s):  
Monetary Policy ◽  
Stock Market ◽  
Business Cycle ◽  
Interest Rates ◽  
Stock Markets ◽  
Economic Activity ◽  
Negative Impact ◽  
Financial Assets ◽  
Government Bonds ◽  
The Business Cycle

This chapter examines how monetary policy, in itself and through its dependence on the business cycle, affects prices on financial assets. The chapter shows that changes in the monetary policy rate affect yields on government bonds with longer maturity as well as corporate bonds. This typically dampens economic activity. Changes in monetary policy typically also have a negative impact on the stock market. The chapter discusses whether monetary policy in itself affects the stock market or whether it works via its effect on the business cycle. It turns out that economic activity in itself, and monetary policy in itself, both affect the stock market. It is important to be aware of both channels, i.e. how economic activity affects the stock market and how monetary policy affects the stock market.

scholarly journals A stylized macro-model with interacting real, monetary and stock markets

2021 ◽  
Author(s):  
F. Cavalli ◽  
A. Naimzada ◽  
N. Pecora
Keyword(s):  
Stock Market ◽  
Interest Rates ◽  
Stock Prices ◽  
Stock Markets ◽  
Stock Price ◽  
Market Integration ◽  
Dynamic Properties ◽  
National Income ◽  
Money Market ◽  
The Business Cycle

AbstractWe propose a model economy consisting of interdependent real, monetary and stock markets. The money market is influenced by the real one through a standard LM equation. Private expenditures depend on stock prices, which in turn are affected by interest rates and real profits, as these contribute to determine the participation level in the stock market. An evolutionary mechanism regulates agents’ participation in the stock market on the basis of a fitness measure that depends on the comparison between the stock return and the interest rate. Relying on analytical investigations complemented by numerical simulations, we study the economically relevant static and dynamic properties of the equilibrium, identifying the possible sources of instabilities and the channels through which they spread across markets. We aim at understanding what micro- and macro-factors affect the dynamics and, at the same time, how the dynamics of asset prices, which are ultimately influenced by the money market, behave over the business cycle. Starting from isolated markets, we show the effect of increasing the market interdependence on the national income, the stock price and the share of agents that participate in the stock market at the equilibrium. Moreover, we investigate the stabilizing/destabilizing role of market integration and the possible emergence of out-of-equilibrium dynamics.

scholarly journals Cyclical Fluctuation, Growth, and Stabilization: An Empirical Investigation of Dual Policy Objectives in Bangladesh

2020 ◽  
Author(s):  
Richmond Sam Quarm ◽  
Mohamed Osman Elamin Busharads
Keyword(s):  
Monetary Policy ◽  
Fiscal Policy ◽  
Business Cycle ◽  
Interest Rates ◽  
Money Supply ◽  
Macroeconomic Policy ◽  
Output Growth ◽  
Long Run ◽  
Short Run ◽  
The Business Cycle

In conventional economics, two types of macroeconomic policy i.e. fiscal policy and monetary policy are used to streamline the business cycle. This paper has examined the cyclical behavior of these variables over the business cycle of Bangladesh. The objective of this examination is to show whether policies (fiscal policy and monetary policy) in Bangladesh are taken with a motive to stabilize the economy or only to promote economic growth. In other words, it has examined whether the policies in Bangladesh are procyclical or countercyclical or acyclical. Hodrick Prescott (HP) filter has been used to separate the cyclical component of considered variables. Both correlation and regression-based analysis have provided that in Bangladesh government expenditure and interest rates behave procyclically, but money supply behaves acyclically over the business cycle. Besides, this paper has tried to identify the long-term as well as the short-term relationship between real GDP and the macroeconomic policy variables with the help of the Johansen cointegration test, vector error correction model (VECM), and block exogeneity Wald test. Through these analyses, this study has found that fiscal policy has a significant impact on GDP growth both in the short-run and long-run. In the case of monetary policy, although the interest rate has an impact on real output both in the short-run and long-run, the money supply has neither a short-run nor long-run effect on output growth.

scholarly journals The Effects of Money Supply and Interest Rates on Stock Prices, Evidence from Two Behavioral Experiments

2021 ◽  
Vol 8 (2) ◽  
pp. 33
Author(s):  
Christian A. Conrad
Keyword(s):  
Monetary Policy ◽  
Interest Rate ◽  
Stock Market ◽  
Interest Rates ◽  
Money Supply ◽  
Stock Prices ◽  
Positive Impact ◽  
Real Economy ◽  
Behavioral Experiments ◽  
The Impact

What is the impact of interest rate and monetary policy on the stock market? Some studies find a positive impact of expansive monetary policy on stock prices others prove the opposite. This paper examines the effects of monetary expansion and interest rate changes on investment behavior on the stock market by illustrating two behavioral experiments with students. In our experiments the increase of money supply and the decrease of interest rates had a direct positive impact on share prices. These findings support the hypothesis that extreme expansive monetary policy with low, zero or negative interest rates encourage financial bubbles on the stock market. To avoid a crash the exit from such a policy must be slow. As happened in 1929, crashes can damage the financial system and the real economy. Central banks must take this into account in their monetary policy.

Stock market crash will blunt monetary policy in China

2015 ◽  
Keyword(s):  
Monetary Policy ◽  
Stock Market ◽  
Interest Rates ◽  
Stock Prices ◽  
Real Economy ◽  
Liquidity Trap ◽  
Content Type ◽  
Bank Of China ◽  
Long Run ◽  
Downward Pressure

Subject Monetary policy and the stock market in China. Significance The People's Bank of China (PBoC) has cut interest rates and required reserve ratios five times this year -- the fastest pace of monetary policy adjustment since the 2008-09 financial crisis. However, the effectiveness of the intervention is diminishing each time, leading to pessimistic expectations of both the stock market and the macroeconomic outlook. Impacts A slowdown in the real economy will hinder recovery of investor confidence and stock prices in the medium term. Higher financial costs due to the 'liquidity trap' will decelerate policy-driven economic growth in the long run. Some foreign capital will flow out of China, putting a degree of downward pressure on the renminbi.

Predicting returns over several decades

2021 ◽  
pp. 292-312
Author(s):  
Jesper Rangvid
Keyword(s):  
Business Cycles ◽  
Business Cycle ◽  
Interest Rates ◽  
Stock Price ◽  
Turning Points ◽  
Long Run ◽  
The Business Cycle

This chapter looks at expectations of returns several decades out. This is obviously a difficult task, as fundamental economic structures might change over such long periods. But we need multi-decade forecasts in certain situations. One conclusion of this chapter is that we must look beyond variables that predict turning points in the business cycle and stock-price multiples when dealing with the very long run. Over multiple decades, we will live through multiple business cycles. Variables that predict the next business cycle will not be particularly informative about the returns we expect over many decades. The chapter focuses on the deep underlying drivers of long-run returns, primarily expectations to long-run economic activity.The chapter also looks at expected long-run interest rates.

scholarly journals Cyclical Fluctuation, Growth, and Stabilization: An Empirical Investigation of Dual Policy Objectives in Bangladesh

2020 ◽  
Vol 3 (4) ◽  
Author(s):  
Sakil Ahmmed ◽  
◽  
Jonaed Jonaed
Keyword(s):  
Monetary Policy ◽  
Fiscal Policy ◽  
Business Cycle ◽  
Interest Rates ◽  
Money Supply ◽  
Macroeconomic Policy ◽  
Output Growth ◽  
Long Run ◽  
Short Run ◽  
The Business Cycle

In conventional economics, two types of macroeconomic policy i.e. fiscal policy and monetary policy are used to streamline the business cycle. This paper has examined the cyclical behavior of these variables over the business cycle of Bangladesh. The objective of this examination is to show whether policies (fiscal policy and monetary policy) in Bangladesh are taken with a motive to stabilize the economy or only to promote economic growth. In other words, it has examined whether the policies in Bangladesh are procyclical or countercyclical or acyclical. Hodrick Prescott (HP) filter has been used to separate the cyclical component of considered variables. Both correlation and regression-based analysis have provided that in Bangladesh government expenditure and interest rates behave procyclically, but money supply behaves acyclically over the business cycle. Besides, this paper has tried to identify the long-term as well as the short-term relationship between real GDP and the macroeconomic policy variables with the help of the Johansen cointegration test, vector error correction model (VECM), and block exogeneity Wald test. Through these analyses, this study has found that fiscal policy has a significant impact on GDP growth both in the short-run and long-run. In the case of monetary policy, although the interest rate has an impact on real output both in the short-run and long-run, the money supply has neither a short-run nor long-run effect on output growth.

Macroeconomic Factors and Pakistani Equity Market”

2004 ◽  
Vol 43 (4II) ◽  
pp. 619-637 ◽  
Author(s):  
Muhammad Nishat ◽  
Rozina Shaheen
Keyword(s):  
Stock Market ◽  
Industrial Production ◽  
Stock Prices ◽  
Stock Price ◽  
Consumer Price Index ◽  
Reverse Causality ◽  
Macroeconomic Factors ◽  
Macroeconomic Variables ◽  
Equilibrium Relationships

This paper analyzes long-term equilibrium relationships between a group of macroeconomic variables and the Karachi Stock Exchange Index. The macroeconomic variables are represented by the industrial production index, the consumer price index, M1, and the value of an investment earning the money market rate. We employ a vector error correction model to explore such relationships during 1973:1 to 2004:4. We found that these five variables are cointegrated and two long-term equilibrium relationships exist among these variables. Our results indicated a "causal" relationship between the stock market and the economy. Analysis of our results indicates that industrial production is the largest positive determinant of Pakistani stock prices, while inflation is the largest negative determinant of stock prices in Pakistan. We found that while macroeconomic variables Granger-caused stock price movements, the reverse causality was observed in case of industrial production and stock prices. Furthermore, we found that statistically significant lag lengths between fluctuations in the stock market and changes in the real economy are relatively short.

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