Authors: Dimitrios Asteriou, Evmorfia Mastrojianni

Title: Stock Prices and Macroeconomic Activity: Evidence from Vector Error-Correction Models and Granger Causality Tests for the Greek Economy

Abstract

The aim of this paper is to investigate the dynamic long-run relationship between selected macroeconomic aggregates and the performance of the Greek Stock Market. In this context, interest rates, inflation, industrial production and sector-specific indexes are tested for causality towards the general index of the Athens Stock Exchange. To elevate the research into an international aspect the Euro/$ exchange rates and oil prices are, additionally, examined. Two Vector Error-Correction Models (VECM) are considered towards this direction. The first model, in its domestic dimension, is comprised of stock returns compared to interest rates, inflation, industrial production and banks, technology, energy and telecommunication indexes. The second model, in its international dimension, is comprised of all the aforementioned variables plus the exchange rates and the oil prices. Monthly data of each variable, for over 30 years, are collected and used. Preliminary empirical findings suggest that changes in the macroeconomic factors have a significant effect on the Greek Stock Market or that Greek Stock Market will constitute an index for future changes in the real economy. In practice, this could contribute to portfolio management and decision-making.