MONEY SUPPLY AND STOCK PRICES

Sammanfattning: This thesis deals with money supply and stock prices. Specifically it inquires what macroeconomic factors influences the stock market index. Given the high degree of equity correlation in the market, variables previously used for explaining the cross-section of expected returns are tested against the S&P500 index. The macroeconomic variables used in Chen et.al (1986) are tested for their ability to explain index movements. This is done via standard OLS and probit estimation. The properties of these estimators are then ascertained via simulation. Finally, bias-corrected maximum likelihood estimates are obtained via bootstrapping. These variables generally perform poorly but the ability of money supply to explain index movements depends crucially on an underlying systemic analysis. In addition, indications of future specifications are derived from the simulation results. Certain relations that hold promise for future research in financial economics are also presented, particularly with respect to the extraordinary monetary policy actions undertaken in the wake of 2008.