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The impact of income, inflation and happiness on stock returns: a dynamic heterogeneous panel estimation
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Date
2015
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Abstract
This study examines the long-run relationships and short-run dynamic interactions between stock returns and its determinants comprising of GDP per capita, inflation and happiness, over the period 1973 to 2012. The study applies the dynamic heterogenous panel estimation techniques of Mean Group (MG), Pooled Mean Group (PMG) and the Dynamic Fixed Effects (DFE) to analyse a set of macro panel data on selected OECD countries to establish the possible causal relations between these variables. The results of this study show evidence that income has a favourable impact on the stock market, while inflation dampens stock returns. Interestingly, the study also revealed that happiness is not significant in determining stock returns in these selected countries, indicating that the market participants are rational economic beings who always act in self-interest, making optimal decisions by trading off costs and benefits weighted by statistically correct probabilities as per the tenets of the Efficient Market Hypothesis (EMH).
Keywords
Stock returns , GDP per capita , Inflation , Happiness , Pooled-mean group
Citation
Rasiah, R. R. V., Habibullah, M. S., & Abdul Hamid, B.. (2015, June 2-4). The impact of income, inflation and happiness on stock returns: a dynamic heterogeneous panel estimation. Paper presented at the 17th Malaysian Finance Association Conference, Kota Kinabalu, Sabah, Malaysia.
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