Macroeconomic Variables and Stock Market Interactions: New Zealand Evidence

In this paper, we examine the relationships between the New Zealand Stock Index and a set of seven macroeconomic variables from January 1990 to January 2003 using cointegration tests. Specifically, we employ the Johansen Maximum Likelihood and Granger-causality tests to determine whether the New Zealand Stock Index is a leading indicator for macroeconomic vari- ables. In addition, this paper also investigates the short run dynamic linkages between NZSE40 and macroeconomic variables using innovation accounting analyses. In general, the NZSE40 is consistently determined by the interest rate, money supply and real GDP and there is no evidence that the New Zealand Stock Index is a leading indicator for changes in macroeconomic variables.