Stability of the “returns–growth” relationship in G7: The dynamic conditional lagged correlation approach

AbstractThe relationship between stock market returns and real economic output has been studied in many empirical works over several decades. We present a simple methodology to verify the time-varying structure of this “returns–growth” relationship using dynamic conditional correlation model. Monthly stock market returns and output growth data for G7 countries from January 1961 to July 2013 are utilized. Our main findings can be summarized as follows: (i) the “returns–growth” relationship is positive and holds over the entire period for all G7 countries, (ii) the average correlations for the US and Canada were higher, and much lower for France and the UK, (iii) after the weakening of the “returns–growth” relationship during 80s and 90s, the correlations between stock market returns and output growth were higher, and (iv) for some countries within several sub-samples we also found evidence, that higher levels of correlation were accompanied with higher levels of market volatility