CAUSALITY TESTS OF THE REAL STOCK RETURN‐REAL ACTIVITY HYPOTHESIS

George W. Gallinger

Research output: Contribution to journalArticlepeer-review

22 Scopus citations

Abstract

Recent studies of the relation between real stock returns and real activity do not examine cause and effect. In this study I use Granger causality tests to examine such a relation. Results support three possibilities. First, changes in stock returns are synonymous with changes in wealth, which influence future demand for consumption and investment goods. Second, an increase in current real activity increases demands on existing capital stock, which ultimately induces future increased capital investment. The stock market anticipates these events. Third, stock returns Granger‐cause a leading economic indicator, the interest rate spread between commercial paper and Treasury bills.

Original languageEnglish (US)
Pages (from-to)271-288
Number of pages18
JournalJournal of Financial Research
Volume17
Issue number2
DOIs
StatePublished - 1994

ASJC Scopus subject areas

  • Accounting
  • Finance

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