We are made to believe the stock market is a good measure for the actual economy. However, while the S&P 500 has been strong for almost 40 years, U.S. GDP growth has slowed down considerably. This paper aims to conduct an analysis of the established econometric relationship between these economic concepts and delve into its joint dynamics and linear interdependencies. To do this we use a VAR model to test Granger causality and analyze the Impulse Response Functions based on a quarter time series ...
We are made to believe the stock market is a good measure for the actual economy. However, while the S&P 500 has been strong for almost 40 years, U.S. GDP growth has slowed down considerably. This paper aims to conduct an analysis of the established econometric relationship between these economic concepts and delve into its joint dynamics and linear interdependencies. To do this we use a VAR model to test Granger causality and analyze the Impulse Response Functions based on a quarter time series data for the year 1947 to 2018. While the S&P 500 cannot be predicted in our study, we can show a positive historical relation between current U.S. GDP growth and past S&P 500 growth when comparing our results with an AR model. As such, our analysis aims to utilize S&P 500 as a short-run leading indicator to forecast U.S. GDP behavior.
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