Do macro shocks matter for equities?

Working papers set out research in progress by our staff, with the aim of encouraging comments and debate.
Published on 10 November 2017

Working Paper No. 692
By Will Dison and Konstantinos Theodoridis

We investigate the role of macroeconomic shocks in driving equity price dynamics, focusing in particular on the United Kingdom as a small open economy. Using a vector error correction model estimated on 34 macroeconomic and financial time series, we show that shocks to demand, supply, monetary policy and total factor productivity account for a significant proportion of the variation in both UK and US equity prices. In contrast to some of the earlier literature, we find that shocks to total factor productivity play a particularly important role in explaining equity price movements, particularly at longer horizons. Reflecting the international nature of the FTSE All-Share, we find that most of the variation in UK equity prices is accounted for by foreign shocks, even for relatively UK-focused sectors.

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