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Can The Narrow And Broad Money Supply Gap Be Used As An Investment Indicator For The Stock Market?

Author

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  • YUAN-MING LEE

    (Department of Finance, Southern Taiwan University of Science and Technology, No. 1, Nantai St, Yung-Kang City, Tainan, Taiwan)

  • KUAN-MIN WANG

    (Department of Finance, Overseas Chinese University, 100, Chiao Kwang Rd., Taichung 40721, Taiwan)

Abstract

This study uses the golden cross and death cross formed by the gap between the narrow and broad money growth rates as threshold variables to estimate the threshold model and test the causal relationship between money supply and stock prices in eight emerging market economies (EMEs) in Asia; the sample periods are from January 2000 to December 2020. The results show a high-positive, bi-directional relationship between the money supply and stock prices in the golden cross regime. On the other hand, the money supply has a negative, one-way causality on stock prices in the death cross regime. We also conducted a robustness test during the COVID-19 spread, and the result shows that the mechanism still applies, but the effectiveness is reduced. Thus, our contribution is discovering the golden cross and death cross information formed by narrow and broad money, informing stock market investment.

Suggested Citation

  • Yuan-Ming Lee & Kuan-Min Wang, 2024. "Can The Narrow And Broad Money Supply Gap Be Used As An Investment Indicator For The Stock Market?," The Singapore Economic Review (SER), World Scientific Publishing Co. Pte. Ltd., vol. 69(02), pages 727-749, March.
    • Handle: RePEc:wsi:serxxx:v:69:y:2024:i:02:n:s0217590823410011
    DOI: 10.1142/S0217590823410011
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    Keywords

    Threshold vector autoregression; stock price; money supply; money supply gap; COVID-19;
    All these keywords.

    JEL classification:

    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • C51 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Construction and Estimation
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

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