The Impact of Macroeconomic Variables on Stock Prices: Evidence from the United States

This paper aims to examine the relationship between stock prices and macroeconomic variables in the United States using quarterly data for the period 1988 to 2012. We dentify five macroeconomic variables ( i.e, gross domestic product, inflation, real money supply, Treasury bill rate, and oil prices) that researchers have linked to stock prices. We then examine the relationship between these macroeconomic variables and the S&P500 by estimating cointegration system using Johansen technique. Moreover, this paper will use Vector Error Correction Model (VECM) to test the short run relationships. Also, we use variance decomposition technique to understand which macroeconomic variable have more explantory power of the variation in the S&P500.