Empirical study on the relationship between money supply and stock market in Europe

Abstract

To investigate whether the European Central Bank's frequent funding action can strengthen the stock market or not, the actual relationship between money supply and stock market in Europe deserves research, especially during the debt crisis. This article first presented theoretical analysis on the channels through which money supply influences stock market. The study was then verified by empirical analysis based on ADF unit root test and Johansen cointegration test. By creating cointegration model and Vector Error Correction Model and carrying on Granger causality test, further examinations revealed the interaction between money supply and stock market capitalization in the short and long term. The results suggest that stock market capitalization is conversely related to money supply in the long run, whereas money supply has positive impact on stock market capitalization in the short-term, but it's not the Granger reason of stock market capitalization. The economic significance were summarized in the last part, then the specific proposals were put forward. © 2012 Springer-Verlag.