Investigating the links between growth and real stock price changes with empirical evidence from the G-7 economies

Abstract

This paper investigates the link between real stock price changes and economic growth. We develop a simple growth model, which presents the relationship between real stock prices and output. Evidence from the G-7 economies by use of the Vector Autoregression (VAR) methodology shows that real stock price changes and output growth are strongly related, as predicted by the theoretical model. The bivariate framework also provides useful information for understanding the response of economic growth and real stock prices to external shocks.