Money and Stock Prices: Economic Theory
This chapter delivers theoretical aspects, which form the underlying basis for the empirical investigation of the relationship between liquidity conditions and the stock market. The chapter is divided into three parts. The main part covers theoretical considerations of why money might affect stock prices (Sect. 3.2). Since it is unclear from the outset whether causality runs from money to stocks or from stocks to money, the second part of this chapter presents theories that describe the role of stocks for money demand (Sect. 3.3). Last, Sect. 3.4 derives the variables, which should be included in the empirical analysis based on the theoretical findings in this chapter.