Exploring the Dynamics: Granger Causality Between Macroeconomic Variables and Sectoral Stock Prices Before and After the 2008 Financial Crisis: Evidence From The FTSE All-Share Index

This study provides a quantitative analysis of the causal association between macroeconomic factors and stock share prices at the sectoral level in the UK, with a specific emphasis on the periods prior and after the global financial crisis of 2008. Employing both conventional and quantile Granger causality analysis, we examine the causality between GDP, interest rates, money supply, inflation, exchange rates, and the sectors of the FTSE All-Share index covering the period from 1999 to 2022 by dividing the sample to prior the financial crisis from 1999 to 2007 and after the crisis from 2008 to 2022. Our results present complex and dynamic causation, which varies among different sectors and economic circumstances. The conventional Granger causality test revealed limited findings, whereas the quantile technique reveals deeper bidirectional causality in particular quantiles, implying that the impact of economic factors on stock prices is reliant upon the current economic circumstances. For instance, before the financial crisis of 2008, the standard Granger causality test revealed that GDP causes only the consumer staples and energy sectors, but there were no causation effects from stocks to GDP. However, the Granger causality test for quantiles suggested a bidirectional effect between GDP and stock prices across various distributional quantiles, which indicates that stock prices also cause changes in the GDP, particularly in the upper and middle quantiles of the distribution. However, After the financial crisis from 2008 to 2022, the traditional Granger causality analysis indicates that GDP do not predict the FTSE All-Share index or any of its sector indices. However, the index and its sectors (except the materials sector) caused significant changes in GDP. The more in-depth analysis of the quantile Granger causality tests revealed a significant causality from the FTSE All-Share index and its sectors to GDP in the majority of quantiles, in addition to causality from GDP to stock prices, but in fewer quantiles. The two tests agreed on the extreme effect of stock prices on GDP after the crisis, but they were dissimilar regarding causality in the other direction. These findings emphasise the significance of involving distributional elements in economic examination and present valuable implications for investors, policymakers, and economic analysts, emphasising the importance of customised strategies that meet distinct market situations and sectors.