The relationships between stock markets and monetary policies for United kingdom was investigated by applying time-series analysis. Using Granger causality modeling technique, this study tested whether real stock returns(RSR) are caused by M2 growth (GM2). The empirical results shows that stock market is consistent with efficiency, which means that people have rational expectation in the stock market of United Kingdom with respect to monetary policy. However, the residuals of these models tested by Hinich (1982) are not clean, it means that it still have some information in the residuals of these models. Adopting the MARS approach proposed by Friedman (1991) seems to have solved the violation of the Hinich test for the stock data of U.K. in VAR models. It was also found that the lags of GM2 for U.K. is of relative importance in the MARS models. In addition, the residuals of ARCH models, ARCH-M models, and GRACH models considered appropriate for financial data could not pass the Hinich test in my empirical study, indicating that these ARCH-type models lack nonlinear concerns.
Relation:
第二屆國際動態經濟模型應用研討會論文集=Proceedings of the Second International Conference on Applications of Dynamic Models to Economics，頁389-404
