Stock market performance and gross domestic product innovations
Skip to main content
- GDP growth appears to lead stock prices rather than follow them, indicating that GDP is a key driver of stock market performance.
- In the long run, real GDP has a strong positive effect on stock prices: a 1% increase in GDP is associated with nearly a 4% increase in stock prices.
- Interest rates and inflation have significant negative effects on stock prices in both the short and long run; interest rates have the strongest impact, with a 1% increase reducing stock prices by more than 5%.
- The findings highlight the importance of GDP, interest rates, and inflation for investors and policymakers, suggesting that financial stability should be considered alongside inflation targeting.
This paper examines the impact of real (ie, inflation-adjusted) economic activity on the Amman Stock Exchange stock prices for the period 1993–2022 by using the autoregressive distributed lag (ARDL) bounds test. Gross domestic product has a profound effect on stock prices: a 1% increase in real GDP leads to an almost 4% increase in stock price. This result is a strong indication that stock prices follow rather than lead GDP, consistent with a large body of empirical results of the developed countries. Interest rate and inflation rate effects on stock prices are negative and significant in both the short and long run, while domestic credit is not significant in the long run. The interest rate has the strongest impact on stock prices: an increase of 1% leads to a decrease in stock prices of more than 5%. While the Central Bank of Jordan is targeting inflation in the management of its monetary policy, the country’s financial stability will be at stake due to the resulting volatility. The independent variables appear to jointly cause short-term movements in stock prices; all the variables are significant, and the error correction term is very high and significant, confirming the long-term relationship.
Copyright Infopro Digital Limited. All rights reserved.
You may share this content using our article tools. As outlined in our terms and conditions, https://www.infopro-digital.com/terms-and-conditions/subscriptions/ (clause 2.4), an Authorised User may only make one copy of the materials for their own personal use. You must also comply with the restrictions in clause 2.5.
If you would like to purchase additional rights please email info@risk.net
You need to sign in to use this feature. If you don’t have a Risk.net account, please register for a trial.
