The United States stock market: The impacts of internal and external macroeconomic variables

During the past few years, several economic crises such as the recession in Japan, the Asian crisis, the decrease in petroleum price, and the Russian crisis have adversely affected many economies around the world especially those of developing countries. In addition, the launch of a single European currency on January 1, 1999, undoubtedly became the biggest event in the world economy. These crises highlight the effect of increasing internationalization and globalization in the sense that economic and financial developments in one country (region) can influence the markets in others. This dissertation is, therefore, oriented toward an investigation of the impacts of internal and external macroeconomic variables on the US stock market, as well as, the interrelationship among regional markets under both short-run and long-run analysis.; Chapter one explains the econometric methods, particularly, the Johansen cointegration methodology, the vector-error correction model (VECM) with Granger causality tests, the variance decompositions (VDC) and impulse response functions (IRF) based on cointegration which will be employed throughout this dissertation. Chapter two examines the relationships between the US stock price index (S&P 500) and internal macroeconomic variables over the period 1975:1–1999:4. This will examine the long-run co-movement between the US stock prices and industrial production, the narrow money supply, the inflation, the 10-year government bond rate, the Treasury bill rate, and the yen/dollar rate. To study the short-run dynamic system, the Granger-causality, the VDC and the IRF are used. Chapter three explores the particular spillover effects of country groups on the US stock market over the 1988:1–1996:12 period. The specific spillovers are interest rate spillover and inflationary spillover from the Group-7 (G-7), Latin America, and Asia; and the monetary effect from the G-7 countries. These economic groups are chosen because they are major trading partners of the US. The G-7 money supply is considered due to its importance in monetary policy coordination among group members. Chapter four maps out the impact of current adverse crises on each region's economy. The study of the long-run co-movement among daily stock prices of the US, Europe, Asia-Pacific, Latin America, and Eastern Europe-Middle East from July 2, 1997 to March 10, 2000 can shed some light on the impact of the financial crises on other regions. The short-run dynamic framework measures the quantitative impacts. The final chapter provides conclusions from chapter two to four.