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Financial Deregulation And The Relationship Between The Economy And The Share Market In Australia

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  • Nicolaas Groenewold

Abstract

In this paper we investigate the effect of financial deregulation on the relationship between the macro‐economy and the share market within the framework of a VAR using quarterly Australian data for four variables – aggregate share prices, real output, the term premium and the default premium. After an analysis of stationarity and cointegration of the variables, we specify the VAR in the first differences of the logs of share prices and output and the levels of the premia. We identify December 1983 as the most appropriate date for testing for a structural break in our model due to financial deregulation and find strong evidence supporting our hypothesis of a break at this date. We go on to estimate and simulate the model separately over two sub‐samples: 1978(1)–1983(4) and 1984(1)–2001(2). While our results are not clear‐cut, we find that, if anything, the deregulation of financial markets weakened the relationship between the share market and the rest of the economy.

Suggested Citation

  • Nicolaas Groenewold, 2003. "Financial Deregulation And The Relationship Between The Economy And The Share Market In Australia," Australian Economic Papers, Wiley Blackwell, vol. 42(4), pages 454-477, December.
    • Handle: RePEc:bla:ausecp:v:42:y:2003:i:4:p:454-477
    DOI: 10.1111/1467-8454.00210
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    References listed on IDEAS

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    1. Davidson, Russell & MacKinnon, James G., 1993. "Estimation and Inference in Econometrics," OUP Catalogue, Oxford University Press, number 9780195060119.
    2. Malcom Edey, 1996. "Introduction to The Future of the Financial System," RBA Annual Conference Volume (Discontinued), in: Malcom Edey (ed.),The Future of the Financial System, Reserve Bank of Australia.
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    Cited by:

    1. Renée Fry & James Hocking & Vance L. Martin, 2008. "The Role of Portfolio Shocks in a Structural Vector Autoregressive Model of the Australian Economy," The Economic Record, The Economic Society of Australia, vol. 84(264), pages 17-33, March.
    2. Lance A. Fisher & Graham M. Voss, 2004. "Consumption, Wealth and Expected Stock Returns in Australia," The Economic Record, The Economic Society of Australia, vol. 80(251), pages 359-372, December.

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