Macroeconomic Factors and the U.S. Stock Market Index: A Cointegration Analysis

Abstract

This thesis is aimed at investigating the impact that changes and shocks in a set of selected macroeconomic variables have on the U.S. stock market returns. The existence of a long-run equilibrium relationship between fundamentals and the stock market index is inquired using the methodological framework of cointegration analysis and a vector error correction model. Moreover, the short-run dynamic dependencies between the variables are examined by performing an impulse response analysis and the empirical question of whether economic variables are useful indicators of future stock market returns is addressed. The empirical results of this study indicate that the U.S. stock market index establishes a cointegrating relationship with changes in the selected macroeconomic variables, showing that information about relevant economic indicators is reflected in stock returns and that changes in fundamentals are significantly priced in the stock market index. In addition, the impulse response analysis highlights the presence of meaningful short-run dynamic effects, on the grounds that innovations in the macroeconomic variables are seen to exert an impact on stock prices.