IS THE STOCK MARKET IN THE PHILIPPINES A LEADING INDICATOR OF ECONOMIC ACTIVITY?

Year 2019, Volume: 1 Issue: 1, 1 - 16, 01.03.2019

Manuel Gerardo Duran

Abstract

The conventional
models for stock pricing are anchored on the assumption that current stock
prices are forward looking as they reflect the estimated future earnings of
firms.  Since expectations of future
earnings are influenced directly by the expected level of economic activity,
then fluctuations in stock prices today may predict the future growth and
direction of the economy. The purpose of this study is to empirically
investigate whether the theoretical proposition that stock prices are a leading
indicator of economic activity applies to a small open economy like the
Philippines. The nexus between stock prices and the real economy is explored
using the Granger causality technique based on the vector error correction
model (VECM) using quarterly data from 1995 to 2017. The findings indicate the
existence of a statistically significant positive long run relationship between
real stock price and real economic growth. The econometric tests further
demonstrate that in the short run, real stock price Granger causes real gross
domestic product (RGDP). This provides evidence that changes in current stock
prices may predict changes in future economic activity lending support to the
leading indicator role of the stock market in the Philippines in the short
run.  However, in the long run, a
unidirectional causality from RGDP to real stock price is likewise detected
suggesting that economic growth contributes to the development of the country’s
stock market over the long term.

Keywords

Stock Prices, Economic Growth, Granger Causality

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