The Relationship Between Macroeconomy and Asset Prices: Long Run Causality Evidence From Lithuania

Abstract

The purpose of this paper is to determine the long-run causal impact of various economic factors on Lithuanian stock, government securities and real estate prices, and to assess how accurately future asset returns can be forecasted based solely on economic information. Five macroeconomic indicators, namely, gross domestic product (GDP), foreign direct investment (FDI), consumer price index (CPI), money supply (MS) and Vilnius interbank offered rate (VILIBOR), were included in the model. The results of the created autoregressive distributed lag model (ARDL) revealed that a long-run causal relationship between Lithuanian assets and macroeconomic variables exists and that changing values of these indicators explain about half of the variability of assets’ returns. The results of ARDL model forecast showed that the most precise predictions are obtainable in real estate market, while forecasted returns of stock and government securities are not so accurate, especially the further forecast horizon. The possibility to understand driving factors behind changes of asset prices and to predict future return is of a particular importance not only for investors and businessmen, but also for the policy makers who are responsible for making substantiated decisions regarding monetary, macroprudential and fiscal policies they conduct.

Influence of Macroeconomic Factors on Stock Prices in Poland – Cross Section and Time Series Analysis

“…Other research confirmed these conclusions also for sectoral indices on OMX Baltic securities market, Rudzkis and Valkaviciene (2014) and for short-time relationship - Pilinkus and Boguslauskas (2009). Autoregressive distributed lag model has been implemented in recent work of Jurksas and Paskevicius (2017) -authors found out that stock prices but also real estate prices are cointegrated with macroeconomic variables, although they suggest that implementing more frequently announced macroeconomic indicators and inclusion of analysis of relation between different assets return would improve the model. Also regarding Polish market there are studies analyzing macroeconomic relations on stock market, but we did not find research involving cross-sectional test of macroeconomic variables impact on rates of returns on stock market.…”