Money Growth and Aggregate Stock Returns

Abstract

We empirically evaluate the predictive power of money growth measured by M2 for stock returns of the S&P 500 index. We use monthly US data and predict multiperiod returns over 1, 3, and 5 years with long-horizon regressions. In-sample regressions show that money growth is useful for predicting returns. Higher recent money growth has a significantly negative effect on subsequent returns of the S&P 500. An out-of-sample analysis shows that a simple model with money growth as a single predictor performs as goods as the constant expected returns model, while models with several predictor variables perform worse than those simple models.JEL code: C58, E44, E47, G14, G17

The Quantitative Easing Bursts Bitcoin Price

“…The relationship of stock prices with the quantity of money M2 has been widely discussed in the literature. Studies found a strong connection of stock prices and the quantity of money, see among others Maskay and Chapman (2007); Širůček (2013); Böing and Stadtmann (2016). Corbet et al (2017) show that monetary interest rates policy decisions and quantitative easing announcements significantly affect the Bitcoin returns volatility and Corbet et al (2020) find significant evidence of volatility spillover transfers from US monetary policy announcements to Currency-based digital assets.…”