Pacific-Basin stock markets and real activity

Abstract

This paper investigates the relationship between the Pacific-Basin country stock returns and real economic activity. It also examines the importance of the Japanese and U.S. economies to the Pacific-Basin financial markets by investigating the effects of the former's industrial production growth rates on the latter's stock market movements. We find that the representative global instrumental variables can explain up to 18% of the monthly portfolio real return variability in the Pacific-Basin stock markets and 46% of the quarterly variability. Our evidence shows that U.S. industrial production growth rates tend to exhibit a stronger and more stable relationship with the Pacific-Basin real stock returns.