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On the Lead–Lag Relationship Between Market Capitalization Ratio and Per Capita Growth

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Opportunities and Challenges in Development

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Abstract

The paper looks at the short-to-medium term lead–lag relationship between stock market performance, as represented by market capitalization to GDP ratio and the performance of the real economy, as represented by per capita GDP growth. The lead–lag relationship is first established theoretically in an asset pricing framework with production and accumulation and then empirically by separately looking at lagged correlations, Granger causality and variance decomposition using data from 35 countries over the period 1988–2012.

The authors thank an anonymous referee for helpful comments on an earlier draft.

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Notes

  1. 1.

    Implicitly, the production function is \(y_t = \epsilon _t k_t l_t\), where \(l_t =1 \forall t\), that is, there is no labour-leisure choice and labour is supplied by the households inelastically at the unit level in each period.

  2. 2.

    This may be verified by differentiating Eqs. (9) and (16) proportionately, noting that the only perturbation to the system comes through a change in \(\epsilon _t\) which induces changes in \(y_t\) and \(k_{t+1}\).

  3. 3.

    A positive productivity shock increases the stock price but also increases output in a greater proportion. Hence, the fall in the market capitalization ratio.

  4. 4.

    This result is reported in Ljungqvist and Sargent (2004).

  5. 5.

    See Sarkar and Sarkar (2019).

  6. 6.

    Data Source: World Development Indicators (www.data.worldbank.org).

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Author information

Authors and Affiliations

  1. Indian Institute of Technology Guwahati, Guwahati, India

    Agnirup Sarkar

  2. Indian Statistical Institute Kolkata, Kolkata, India

    Abhirup Sarkar

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  1. Agnirup Sarkar
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  2. Abhirup Sarkar
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Correspondence to Abhirup Sarkar .

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Editors and Affiliations

  1. Department of Economics and Public Policy, School of Management and Entrepreneurship, Shiv Nadar University, Greater Noida, India

    Simanti Bandyopadhyay

  2. Economics Department, Presidency University, Kolkata, India

    Mousumi Dutta

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Sarkar, A., Sarkar, A. (2019). On the Lead–Lag Relationship Between Market Capitalization Ratio and Per Capita Growth. In: Bandyopadhyay, S., Dutta, M. (eds) Opportunities and Challenges in Development. Springer, Singapore. https://doi.org/10.1007/978-981-13-9981-7_4

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  • DOI: https://doi.org/10.1007/978-981-13-9981-7_4

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