The relationship between stock market returns and the top income shares in Finland between 1920 and 2009

The aim of this study is to study the relationship between stock market returns and top income shares in Finland. Examination is done by analyzing the short- and long-run implications of time series data from 1920-2009 using the VAR methodology. Impulse responses and forecast error variances are studied to analyze the dynamic interactions of variables. The study utilizes the Finnish top income shares to measure inequality through the share of total income that these income groups capture. Income inequality, and inequality, in general, are notable issues that can have huge effects on the current way of life. To examine inequality, it is necessary to understand the components that affect its development. As the financial markets become more and more intertwined with the everyday life, it is reasonable also to measure what is their role in the evolution of income inequality. The results of this study are ambiguous. The analysis is executed with two different lag lengths, whereas the shorter length indicates that there is no significant relationship between these two factors, the longer implies a significant and positive short-run response and negative long-run response to stock return impulse to exist. However, due to this discrepancy in results, no definitive relationship can be drawn between the stock returns and the Finnish top income shares as both, significant and insignificant results are found. The study period imposes limitations that need to be acknowledged, as share ownership and stock market participation are drastically different when comparing 1920 to 2009