Stock returns and economic activity in mature and emerging markets

This paper empirically investigates the dynamic interdependencies between stock returns and economic activity in mature and emerging markets. The existence, kind and strength of potential uni-directional and/or bi-directional relations are examined, running from stock returns to future economic activity and/or from economic activity to future stock returns. A bivariate VAR(12) model is applied and Granger causality tests are performed. Monthly data covering the January 1991–December 2006 period are used. The existence of an empirical relationship, with forecasting ability, between stock returns and future economic activity is confirmed. The results are strongly differentiated between mature and emerging markets.