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DYNAMIC RELATIONS BETWEEN MACROECONOMIC VARIABLES AND THE JAPANESE STOCK MARKET: AN APPLICATION OF A VECTOR ERROR CORRECTION MODEL
Author(s) -
Mukherjee Tarun K.,
Naka Atsuyuki
Publication year - 1995
Publication title -
journal of financial research
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.319
H-Index - 49
eISSN - 1475-6803
pISSN - 0270-2592
DOI - 10.1111/j.1475-6803.1995.tb00563.x
Subject(s) - error correction model , econometrics , autoregressive model , economics , stock market , cointegration , vector autoregression , stock (firearms) , dimension (graph theory) , mathematics , paleontology , horse , pure mathematics , engineering , biology , mechanical engineering
By employing the vector error correction model (VECM) in a system of seven equations, we find that the Japanese stock market is cointegrated with a group of six macroeconomic variables. The signs of the long‐term elasticity coefficients of the macroeconomic variables on stock prices generally support the hypothesized equilibrium relations. Our findings are robust to different combinations of macroeconomic variables in six‐dimension systems and two subperiods. Also, the VECM consistently outperforms the vector autoregressive model in forecasting ability.