Abstract
Sprinkel (1964) pioneered the investigation of the relationship between the amount of money and the stock market. He justifies his approach with the monetary portfolio model.His findings are based on a graphical inspection of money growth and stock market turning points. His main conclusion is that stock prices lag behind changes in the growth rate of money supply. Applying this finding to the market, Sprinkel (1964, p. 149) formulates an investment rule, which states that “[a]ll funds were invested in stocks until monetary growth had declined 15 months, and then all funds were invested in bonds until monetary growth had risen two months.” This rule is based on the finding that for the period under investigation between 1918 and 1960 a bear market in stock prices was predicted 15 months after each peak in monetary growth, and that a bull market was predicted two months after each trough of monetary growth. One downside of Sprinkel’s analysis is the ex-post identification of peaks and troughs, because he uses data which is only available several quarters after the peaks and troughs. Hence, it is difficult to apply his rule in real time. The reason for this is that he identifies peaks and troughs not only numerically but also pays attention to business cycle peaks as identified by the National Bureau of Economic Research (NBER). The information from the NBER, however, is only available several quarters after the turning points (Rozeff 1974, p. 288).
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Notes
- 1.
See Sect. 3.2.1.1 for a description of the monetary portfolio model and the derivations for the relationship between money and asset prices.
- 2.
See Sect. 3.2.2.2 for theoretical considerations of the discount factor for stock prices as well as Sect. 3.2.3.1 for theoretical aspects of the relationship between dividends and stock prices.
- 3.
For non-US analyses, see, for example, Cheng (1995) for the UK and Cheng (1996) for international analyses.
- 4.
See Sect. 3.2.1.2 for theoretical considerations of the relationship between inflation and stock prices.
- 5.
The analysis of Conover et al. (1999, monthly data from 1956 to 1995, national stock markets, regression analysis) focuses more on the monetary policy stance and stock prices instead of money supply developments.
- 6.
See, for example, Williams (1999), Montgomery (1999) and The Economist (1997, pp. 77–78).
- 7.
However, this measure of excess liquidity has a crucial underlying assumption. It assumes that the velocity of money remains constant over time, which is far from certain (Becker 2007, p. 6).
- 8.
A study that closely follows the systematic of Baks and Kramer (1999) is the one from Borja and Goyeau (2005). They apply quarterly data between 1995 and 2005 to determine whether or not international liquidity affects asset prices in the US, the euro area and the ASEANFootnote 9 region. The findings of their regression analyses can be summarized by the fact that liquidity spillover effects exist, which play a role for US and European asset returns, but not for asset returns in the ASEAN region.
- 9.
Association of Southeast Asian Nations
- 10.
Since their paper is only available in French, this overview is based on the description in Clerc (2007, pp. 19–22).
- 11.
Other recent studies investigate the consequences of global excess liquidity. Since their focus is more on output and inflation than on the stock market, they are not described in detail. For example, Rüffer and Stracca (2006) analyze the consequences of global excess liquidity and liquidity spillovers on domestic variables in the US, the euro area and Japan in a VAR analysis for quarterly data between 1981 and 2004. Sousa and Zaghini (2004) estimate a structural VAR model to analyze the effects of global liquidity on euro area money stock, prices and output. In addition to academic contributions, the analysis of global liquidity and its consequences is on the radar of many investment banks and economic think tanks. See, for example, Heise et al. (2005), Financial Markets Center (2005, 2006), Sachs (2006) and BCA Research (2007).
- 12.
Maysami and Koh (2000) apply cointegration analysis to the Singapore stock market. They focus on a relatively short period of monthly data between 1988 and 1995. They identify a cointegration relationship between the stock market and the macro variables. However, no restrictions are tested. In addition, analysis of the adjustment coefficients shows that the stock market does not react to the long-run disequilibrium. Consequently, the derived results seem questionable and are not reported here. The same applies for analyses conducted by Wong et al. (2006) who perform cointegration analyses on the Singapore and US stock market.
- 13.
As an example, Flannery and Protopapadakis (2002) estimate a generalized autoregressive conditional heteroskedasticity (GARCH) model based on daily equity returns between 1980 and 1996. They include announcements of 17 macroeconomic series and find that nominal money supply affects the level and volatility of equity returns positively. Even though their study is related to the subject at hand, it differs in its objective and approach.
- 14.
The studies that investigate capital flows mostly focus on the determinants of international capital flows (see, for example, van Wincoop and Tille (2007), Reinhart and Rogoff (2004), and Taylor and Sarno (1997)). Sometimes they include implications on economic growth but rarely in relationship to the stock market. An exception is the literature on the Asian financial crisis, where capital flow reversals (‘hot money’) are often scapegoated for triggering the crisis (see, for example, Mishkin (1999) and Sarno and Taylor (1999)). This, however, is only a point analysis without a focus on the overall role of capital flows.
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Wiedmann, M. (2011). Previous Research. In: Money, Stock Prices and Central Banks. Contributions to Economics. Physica, Heidelberg. https://doi.org/10.1007/978-3-7908-2647-0_2
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