Stock Target Prices
The dramatic increase in stock prices in the 1990s and the following crash beginning in 2000 are evidence of the strong correlation between stock markets across countries. Recent literature documents the link between stock markets in the USA and the rest of the world [Eun and Shim (1989) and Susmel and Engle (1994), among others]. Integration of European financial markets is likely to result in even stronger correlation between equity prices in different European countries. This process can also lead to convergence in economic activities across European countries if developments in stock markets influence real variables, such as investment and consumption. Consequently, shocks originating in one European country are likely to affect other economies through the stock market, in addition to the conventional foreign trade channel. Furthermore, as has been discussed in the literature, because of the potential impact of the stock market on macroeconomic activity, equity price movements may be an important determinant of monetary policy [Rigobon and Sack (2003)].
Share Target Prices
Correlation between share price and the real economy has been investigated and
confirmed in the case of the US [Barrel et al. (1999), Barro (1990), and Morck et al. (1990) among others]. This research empirically analysed the direct and indirect effects of the US stock market movements on real consumption and investment. Less work has been done, however, in examining other countries [Edison and Sløk (2001a), Edison and Sløk (2001b)]. Edison und Sløk pointed out that a ten percent increase in the stock market valuations outside of sectors such as technology, media, and telecommunication leads to a 2.5 percent increase of investment in the United Kingdom and 0.2 percent increase in the Netherlands. For Germany and France, the effect is negative and not significant. Whether these results can be applied using the national accounts data as well as the broader share index remains an open question, which this project seeks to address.
Investment in Stock
The aim of this paper is to investigate the relation between equity prices and aggregate stock investment in major European countries. Several econometric approaches are used, including the Granger causality test and impulse-response function calculated from a vector auto regressive model (VAR). The results of our VAR models confirm the significant positive response of investment to changes in equity prices and differing elasticity across countries.
Stock Target Advisor 