The Impact of Macroeconomic Factors on the German Stock Market: Evidence for the Crisis, Pre- and Post-Crisis Periods

Kaan Celebi,Michaela Hönig

doi:10.3390/ijfs7020018

Abstract

Today we live in a post-truth and highly digitalized era characterized by a flow of (mis-) information around the world. Identifying the impact of this information on stock markets and forecasting stock returns and volatilities has become a much more difficult task, perhaps almost impossible. This paper investigates the impact of macroeconomic factors, German government bond yields, sentiment and other leading indicators on the main German stock index, namely the DAX30, for the time period from 1991 to 2018. Using a dataset on 24 factors and over a timeframe of about 27 years, we found evidence that across most subsamples, the Composite Leading Indicator (OECD), the Institute for Economic Research (ifo) Export Expectations index, the ifo Export Climate index, exports, the Consumer Price Index CPI, as well as 3 y German government bonds yields show delayed impacts on stock returns. We further found that the delayed impact of the constituents of the monetary aggregate M2 on stock returns changed direction between the crisis and post-crisis periods. Overall, the results illustrate that in the crisis period a larger number of factors and economic indicators had significant impacts on the stock returns compared to the pre- and post-crisis periods. This implies that in the post-crisis period a macro-driven market prevails.

Highlights

For as long as stock markets have existed, traders have tried to investigate and forecast stock price and capital market developments
On the whole, the results illustrate that for all sample variations, several macroeconomic factors showed a delayed impact on German stock returns
We demonstrated that in cases of significance, lagged German government yields have a negative impact on stock returns

Summary

Introduction

For as long as stock markets have existed, traders have tried to investigate and forecast stock price and capital market developments. The inflationary era in the 1970s led researchers to investigate primarily the relationship between stocks and inflation especially for the stock market in the USA. Looking at the USA, Bodie (1976), Fama and Schwert (1977), Fama (1981), Chen et al (1986) and Pearce and Roley (1983, 1985) found a negative relationship between inflation and asset returns and found that stocks act as a poor hedge against inflation. A further explanation for the negative relationship is given with the “inflation illusion hypothesis” by Modigliani and Cohn (1979): regarding the Fisher hypothesis, increasing inflation expectations lead to higher discounts of the future expected dividends meaning lower stock values

Results

Discussion

Conclusion