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U.S. stock prices and macroeconomic fundamentals: Fresh evidence using the quantile ARDL approach
Author(s) -
Shahzad Syed Jawad Hussain,
Hurley Dene,
Ferrer Román
Publication year - 2021
Publication title -
international journal of finance and economics
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.505
H-Index - 39
eISSN - 1099-1158
pISSN - 1076-9307
DOI - 10.1002/ijfe.1976
Subject(s) - economics , econometrics , cointegration , quantile , distributed lag , quantile regression , equity (law) , stock market index , autoregressive model , stock market , stock (firearms) , financial economics , mechanical engineering , paleontology , horse , political science , law , biology , engineering
This paper explores the long‐run relationship and the associated short‐run dynamics between the U.S. stock market and three major macroeconomic fundamentals, namely the U.S. industrial production index, the U.S. 10‐year Treasury bond yield and the West Texas Intermediate oil price, for the time period covering 1985–2015. The quantile autoregressive distributed lag (QARDL) model presented by Cho et al. (2015) Journal of Econometrics , 188 , 281–300, which combines the autoregressive distributed lag model of Pesaran and Shin (1998), Cambridge University Press, and Pesaran et al. (2001) Journal of Applied Econometrics , 16 , 289–326, and the quantile regression methodology of Koenker and Bassett (1978), Econometrica , 46 , 33–50, is used. This approach analyses the links among the variables over a range of quantiles which represent different states of the equity market. The findings show a significant quantile‐varying cointegration relationship between U.S. equity prices and the three selected macroeconomic factors. The U.S. industrial production index is found to have the largest long‐run influence on the equity market. These findings highlight the importance of market players as well as policymakers to develop a greater understanding and awareness of how macro variables impact stock prices under different stock market conditions, particularly in relation to optimal asset allocation and risk management strategies, among others.