Dec

23

Does Money Supply Growth Contain Predictive Power for Stock Returns?:

This paper examines the predictive power of money supply growth for stock returns. An understanding of any such predictability would be useful for market practitioners and policy makers given the monetary expansion of recent years. Furthermore, knowledge of this relationship can aid our understanding of the causes of stock price movement. Using monthly data over the time period 1959:1-2012:12, we illustrate that money supply growth has negative predictive power for stock returns over and above the predictability contained in more standard predictive variables, including the dividend yield, interest rates and output measures. Of particular note, the predictive power is strongest for future returns measured over a one- to ten-year horizon and suggests increasing money supply is associated with lower risk. Additionally using both a dividend growth predictive equation and a VAR we report results suggesting that predictability also occurs through the cash flow channel. Finally, by using rolling window forecasts we can determine that money supply growth contains incremental information over standard forecast variables and that the result is robust across the sample.


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