Equity prices and macroeconomic fundamentals: International evidence

We address the dynamic linkages between stock prices and economic fundamentals for the period 1990-2009 for France, Germany, Italy, the UK and the US using the rolling-sample cointegration technique and VAR specifications. The empirical analysis is done for the pre- and post-Euro subperiods. In general, the results revealed different sensitivities in the way stock prices reacted to changes in the fundamentals suggesting that stock markets appeared to move independently of them in the long run, especially in the post-Euro period. For example, stock prices were not influenced much by industrial production or interest rates and the impacts of retail trade and crude oil prices on stock prices were smaller in the post- than in the pre-Euro period. An exception is the US's stock market, which showed more sensitivity to crude oil shocks. Finally, when investigating the impact of consumer expectations on stock prices it was revealed that European consumers were more concerned with the general economic and their personal financial situations than with inflationary pressures (except perhaps in Germany) in both subperiods.