Review of Related Literature

This section highlights the intricacy in the relationship between macro-economic variables and stock prices by making a survey of selected previous studies. The numerous empirical studies have focused on the dynamic relationships between stock market movement and economic activity, particularly for developed stock markets such as the United States, United Kingdom, Germany, and Japan. However, studies in this area are different in terms of their hypotheses and the methods used. Many of these studies have pioneered new modeling techniques or have explored different hypotheses; many have worked simply to apply important theories to a new set of data. Some of the studies differ substantially in the type of economies they examined, in the sample size they studied, in the regional area, or in their overall purpose. Moreover, several studies have investigated the predictability of stock returns for real economic activity. A large body of research focuses on the integration of stock markets across the economies. Another important dimension in previous studies is the examination of the short- and long-run relationship between stock prices and macroeco-nomic and financial variables such as inflation, the interest rate, and output. Within this group of studies, some studies have examined economic factors that affect stock prices, while others have examined factors that determine stock return volatility.