Stock returns and economic growth

Abstract

Theoretical considerations appear to support the conjecture that stock returns are positively related to growth in the long run. However, the empirical literature does not give unanimous support to the theory. Based on a stochastic general equilibrium model it is argued that the long-run relationship between stock returns and per capita income growth is ambiguous and depends on output volatility. Using a century of data for 20 Organization for Economic Co-operation and Development (OECD) countries it is shown that the relationship between stock returns and growth is positive over the period 1916-1951, in which output volatility was persistent. Outside this period no relationship between stock returns and growth is found. These findings are consistent with the predictions of the theoretical model.

Dynamics in the co-movement of economic growth and stock return: comparison between the United States and China

“…per capita growth is negative over 1900-2002 in 16 countries. Using the data of 20 countries, Madsen, Dzhumashev, and Yao (2013) find that the relation of stock return and economic growth is positive over and no relation existed outside the period. Pan and Mishra (2018) find that the relationship between stock market and real sector of the economy is negative but miniscule in China.…”

Determinants of Stock Price Volatility: A Literature Review

“…As an example, Kim (2003), Ratanapakorn and Sharma (2007), Gallegati (2008), and Humpe and Macmillan (2009) have identified the GDP as a significant variable in USA stock volatility. But studies of Chen (2009), Shiblee (2009), Madsen et al (2013), Hossain and Hossain (2015), and Alexius and Spang (2018) rejected the GDP value for modeling and forecasting the stock prices in USA. Similarly, in India, GDP is a significant determinant in one context (Reddy, 2012) and insignificant in another context (Bhattacharya & Mukherjee, 2006;Sarkar, 2006).…”