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This article examines the long run relationship between economic growth and stock prices for Canada and the United States through cointegration estimation procedure, and it implements the Vector Error Correction Models (VECM) to abstract simultaneously the short- and long-run information in the modelling process. The results from the cointegration tests reveal that economic growth and stock prices share long run equilibrium relationship for both Canada and the U.S. The results from the VECM indicate that for the U.S., causality runs from economic growth to stock prices but not vice versa. However for Canada, the results reveal that there is a bi-directional causality between economic growth and stock prices.
This study employs Bayesian Vector Autoregression (BVAR) and Time-Varying Structural VAR (TVP-VAR) models for the Euro area, and the US to analyse the impacts of the shadow short rates (SSRs) on the Treasury-Euro Dollar rate (TED spread) and stock returns. Forecast error variance decompositions (FEVDs) of the BVAR indicated that the volatility in stock markets and the bubbles in financial assets can be mitigated by the SSR in the Euro area. However, the results of FEVDs showed that the credit risk cannot be explained substantially by monetary policy. According to our results, the contractionary monetary policy will decrease the stock returns; thus, it can be revealed that asset price bubbles and financial crisis risk can be controlled. It was also indicated that the contractionary monetary policy led to an increase in the TED spread, which in turn raised the probability of credit risk after the 2008 – 2009 global financial crisis (GFC).
The paper assesses the importance of industry effects present in stock returns, and compares them to country effects. We follow the assumption that strong industry effects might be present as a result of increasing power of globalization and economic integration, which lower the country-level differences. We find this development to be a contradiction to the theories of previous decades that suggested a dominance of country over the industry effects. As the economies change, we expect the country effect to become less dominant, or even fall behind the industry effects. These ideas are used in an application of portfolio management, in which we compare the risk and return characteristics of portfolios created using different strategies. By forming diversified and concentrated portfolios with industrial and country emphasis we show that industry diversification provides the greatest risk reduction.
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