Stock Returns And Monetary Aggregates

Abstract

This paper examines the relationship between stock returns and money growth using the regression framework of Sims and Akaike’s final prediction error criterion.  Stock returns are found to lead unexpected money growth. Investors seem to base their decisions on “anticipated” short run monetary policy.  Empirical results suggest that the market is efficient, although returns for large firms seem to adjust to new information faster than their smaller counterparts.