The influence of macroeconomic factors on the stock markets in the Baltic countries and Western Europe - A comparison

University essay from Lunds universitet/Nationalekonomiska institutionen

Abstract: The relationship between the stock market and the condition of a country’s economy is a relevant topic in the recent economic and financial studies. Therefore, the purpose of our thesis is to investigate in finding long-term and short-term relationships between the stock market and macroeconomic variables in the three Baltic countries and compare the results with three more economically developed Western European countries such as Germany, Italy and UK. To achieve our goal, we apply three methods: Johansen cointegration test, vector error correction model (VECM) and Granger causality test. The results from cointegration test reveal that long-term relationship exists between the variables. VECM shows that the number of significant macroeconomic determinants of the stock market index is not noticeably higher in more developed European countries. Money supply is the dominant factor in explaining the changes in the stock market in the Baltic countries and interest rate – in Western European countries. The main findings from Granger causality test which is applied to the two subsamples – before and after the economic crisis are as follows: more significant relationships between stock index and macroeconomic variables occur after the crisis for the Baltic countries and the Western European countries – before the crisis.

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