The country by country analysis shows a diverse picture (Table 2, column (1)): in
terms of domestic currency, we find countries exhibiting pro-cyclical co-movements be-
tween GDP growth and the stock market, namely Australia, Canada, the Netherland,
Sweden and the United States. Australia shows the highest coefficient (5.28), implying
that a percentage point increase of the GDP growth rates moves along with a more than
five percentage point increase in stock market capital gain rates. Hence an economic
expansion is also reflected in higher share prices. The other countries in the sample do
not show any significant co-movements in terms of domestic currency. When the data are
denominated in US dollars (column (3)) coefficients and significance levels obtained are
very similar (only Canada’s coefficient turns insignificant, whereas Finland’s coefficient is
significant).
In the second specification the co-movement of the deviation of domestic GDP growth
from global GDP growth and the deviation of domestic rates of capital gains from global
rates (provided by the Datastream World Index of Share Prices) is analysed. Hence the
question if the idiosyncratic part of domestic growth is reflected in the idiosyncratic part
of the stock market performance is now also approached on an individual country level.
Thus, we run
(EQKGit - EQκG*t) = αi + βi (git - g*t) + eit (3)
where EQKG* is the annual real rate of capital gains on the world stock market index
and g* is the annual real rate of world GDP growth. In domestic currency terms, Finland,
New Zealand and Sweden show significant positive coefficients. Hence for these countries
the idiosyncratic part of GDP growth is also reflected in the stock market performance.
As this also holds in terms of US dollars, it implies that an international investor is able
to reap exceptional economic expansion by means of excess stock market returns in theses
countries.
For Denmark, the United Kingdom and the United States, on the other hand, we
find negative relations. Remarkably, the coefficients are in the range of -3. Applying
this result means that an increase in the “excess” (relative to the world economy) GDP
growth rate of one percentage point is associated with a decrease in the differential of the
domestic to the world stock market of three percentage points. A possible explanation
could be especially for the United States, that the domestic stock market performance
is influenced to a great extent by global factors, for example as higher world economic
growth is beneficial for large multinational corporations. The specification in terms of US
dollars shows again very similar results indicating that exchange rate movements are a