Causal relations between stock market returns and macroeconomic variables : cointegration evidence from the Norwegian stock market

Abstract

The purpose of this thesis is to investigate whether imperative results on relations between stock returns and macroeconomic variables arising from major markets are valid in a small, open economy such as the Norwegian. By utilizing the vector error correction model (VECM) on monthly data from January 2001 to June 2016, results show that the Oslo All-share index and the selected macroeconomic variables are cointegrated, i.e. there exists a long-run relationship between them. Similarly, six out of ten sectors also proved one cointegrating vector, at the 1% significance level. For the main index, we find negative relations with the NIBOR 3-month interest rate and the exchange rate (USD/NOK). In contrast, positive relations are found for the consumer price index, the industrial production and the price level of the S&P 500 index. Somewhat similar findings are reflected among the different sectors, but specific sectors deviate considerably – implicating a benefit from sector diversification. Especially, industrial production, aggregated consumption and the consumer price index are important determinants of the different sectors, in the long run. The short-run findings suggest that the Oslo All-share index and most of its different sectors respond inaccurately to changes in important domestic real activity indicators such as aggregated consumption and industrial production. These findings correspond with the analysis conducted by Gjerde & Sættem on the Norwegian market in 1999. Although the applied methods are not entirely comparable, the results demonstrate that the same inaccuracies are still in existence almost 20 years later. Similar to major markets such as the U.S. and Japan, the variance decomposition shows that the Norwegian stock market is largely driven by interest rate news. The sector analysis supports this statement. However, varying characteristics in the individual sectors affect the impact from changes in interest rates. Data suggests that the importance of interest rate news is high in sectors such as; Materials, Consumer staples, Health care, Information technology and Telecommunication services. Furthermore, the impulse response analysis reveals that, depending on their operational aspect, sectors react differently to shocks in the selected macroeconomic variables. Lastly, the analysis shows no evidence of bidirectional relations between changes in the price of Brent oil and stock returns of the Oslo All-share index and the different sectors, except for the Energy index. Thus, the statement among practitioners that the stock market in Norway is driven by the development of oil is only to a lesser degree supported in our data.