Open Economics and Management Journal

2014, 1 : 1-13
Published online 2014 July 30. DOI: 10.2174/2352630001401010001
Publisher ID: EMJ-1-1

RESEARCH ARTICLE
 The Determinants of US Stock Market Returns

Samih A. Azar, *
Faculty of Business Administration & Economics, Haigazian University, Mexique Street, Kantari, Beirut, Lebanon

* Address correspondence to this author at the Faculty of Business Administration & Economics, Haigazian University, Mexique Street, Kantari, Beirut, Lebanon; Tel/Fax: +9611349230. E-mail: samih.azar@haigazian.edu.lb

ABSTRACT

In the literature there are many determinants for the times series of US stock returns. The most notable are: inflation, inflation uncertainty, and the relative change in the value of the US dollar. This paper aims to reconsider and update this research question. Monthly data sets are used with the S&P 500 as the measure of the stock market index, and the US trade-weighted foreign exchange rate index as the measure of the US dollar. Least squares regressions, GARCH regressions and least square regressions with endogenous calendar breakpoints are estimated. The evidence is strong that US inflation and US inflation uncertainty do not have an impact on US stock market returns. However, for the recent sample, a significant relation between the US S&P 500 and the US dollar exists, while in the older sample such a relation is negated. Finally, there is evidence that the growth rate in the money supply has a negative and delayed impact on US stock returns whatever the econometric specification. This anomalous relation runs against market efficiency.

Keywords:

Baa corporate bond yield, economic exposure, GARCH, Gordon constant growth dividend model, inflation, inflation uncertainty, least squares with calendar breakpoints, market efficiency, money supply, real personal disposable income, S&P 500, US dollar.