Stock prices, asset portfolios and macroeconomic variables in ten European countries

This paper investigates the relationship between stock indices, asset portfolios and macroeconomic variables in ten European countries. It is shown that employment, imports, inflation and interest rates are inversely related to stock prices. Expectations about future real activity, measures for money and the U.S. yield curve are positively related to stock prices. A portfolio of European stock indices was constructed and it is shown that this portfolio is the variable that most strongly explains the variation in the stock prices. The associations between stock prices and macroeconomic variables are shown to be strongest in Germany, the Netherlands, Switzerland and the United Kingdom. There is a high degree of similarity between the effects in the first three of these countries. In several instances the stock prices are related to historic value of economic variables indicating that predictive models can be constructed.