The Stock Market As A Leading Indicator: An Application Of Granger Causality

The purpose of this paper, then, is to evaluate stock prices as a leading indicator of economic activity. Time-series analysis and the notion of Granger causality are used in this project to estimate relationships between stock prices and the economy, and to see if they are consistent with theory. In this paper, we will explore the following questions. First, does the stock market lead the real economy, in the sense that variation in its past values explains some of the variation in the real economy? Second, does the stock market Granger-cause the real economy, in which case past values of stock prices improve the prediction of future economic activity? And third, does the real economy Granger-cause the stock market, in that past values of economic activity improve the prediction of the stock market

The Stock Market as a Leading Economic Indicator: An Application of Granger Causality

The stock market has traditionally been viewed as an indicator or predictor of the economy. Many believe that large decreases in stock prices are reflective of a future recession, whereas large increases in stock prices suggest future economic growth