The relationship between stock prices and aggregate economic activity

This study assessed interrelationships between movements in stock prices and changes in macroeconomic activity. Economists discovered that globalisation created interdependence between the economic activities of various countries and between stock price movements in different markets. A significant relationship may exist between the stock market of an economy and macroeconomic activity in another economy, and vice-versa. Focusing first on the relationships between stock prices in different countries, and the international links between the economic activities of different nations, it was determined that international ties become stronger over time. The US is dominant in transmitting shocks from its economy to that of other countries and from its stock market to foreign equities. For the relationship between a nation¿s stock market and its economic activity, it was found that generally equities are a leading indicator of output. In tying all the aspects of the analysis together, results indicate that in a number of instances, shocks to stock prices were found to significantly affect the economic activity in their country of origin as well as the output growth of other nations.