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Money supply endogeneity and bank stock returns

Author

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  • Z. E. Badarudin
  • M. Ariff
  • A. M. Khalid

Abstract

This article presents results of tests on two related hypotheses on money supply. The first relates to an unresolved issue of money endogeneity while the second centres on the yet-explored relationship between money supply and bank stock returns if money is found to be endogenous. Our results, using long-horizon data of Group of Seven (G-7) economies, supports causality in money supply as running from bank lending to bank deposits, a result that is predicted by the post-Keynesian money supply endogeneity (bank-credit-driven) theory. Thus, the result is not consistent with exogeneity proposition. A new evidence of positive relationship between endogenous money supply and aggregate bank stock return is statistically significant on this hitherto unexplored topic. These findings are consistent with the post-Keynesian money supply theory and the dividend valuation theory, which predicts money supply changes to induce changes in bank earnings, so bank share prices change.

Suggested Citation

  • Z. E. Badarudin & M. Ariff & A. M. Khalid, 2011. "Money supply endogeneity and bank stock returns," Applied Financial Economics, Taylor & Francis Journals, vol. 21(14), pages 1035-1048.
    • Handle: RePEc:taf:apfiec:v:21:y:2011:i:14:p:1035-1048
    DOI: 10.1080/09603107.2011.562162
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    3. Mittal, Amit & Garg, Ajay Kumar, 2018. "Bank stocks inform higher growth – A System GMM analysis of ten emerging markets in Asia," MPRA Paper 98253, University Library of Munich, Germany.
    4. Roudari, Soheil & Salmani, Yunes, 2020. "Macroeconomic Effects of Government Debt to Banks in Iran," Journal of Money and Economy, Monetary and Banking Research Institute, Central Bank of the Islamic Republic of Iran, vol. 15(4), pages 403-422, October.
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    6. Trunin, P. & Vashchelyuk, N., 2015. "The Analysis of Money Supply Endogeneity in Russia," Journal of the New Economic Association, New Economic Association, vol. 25(1), pages 103-131.

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