What is the theoretical relationship between Stock market and Index of Industrial production (IIP) , if IIP is taken as a proxy for GDP of a country?
Thank you in advance for your cooperation.
i would consider the work of Fama and French.
when considering individual securities, it is similar to inquiring about systemic risk, in a sense.
thus, it may be tautological. IIP may be highly correlated with the stock market in totality, because the one determines the other.
depending on how IIP is measured, it may not be that correlated with GDP - that good a proxy of GDP - particularly if the services component of GDP is large.
in both cases, it is a case of the proportion of manufacturing to services. and the proportion of manufacture/ industrials in the stock market/ GDP
Dear Karobi,
All that was said by Zubair and Brian is right, and although I agree with them, there is something that deserves to be mentioned:
- Before one sees a correlation between Industrial Activity and Stock Market, one should look to the volatility of the specific stock market.
In the '3rd world' stock market, most of the operations are defined/decided in short-term basis, just day-trade sometimes. In all these cases, that correlation is not true, since it´s not a decision point. All the buyers and sellers are looking for the market (just the buying and selling) and trying to buy cheap and sell better.
Maybe you think I am exagerating, but believe me, I am not. I have operated in Brazil´s stock market for 10 yrs (2002 to 2011) and have seen much.
Best regards.
Hi Karobi,
Although the relationship b/w stock marker & IIP should exhibit a positive correlation, it may not necessarily be true. Stock market movements may be due to a variety of factors other than macroeconomic factors or firm specific factors for e.g., speculative forces, demand & supply of some shares/ stock, availability of free-float shares, liquidity in the market, profit booking, availability of other avenues for investment etc..
Also, stock market movement is measured by movement in its indices which comprise of different companies. These companies may be from tertiary sector i.e. service industries & where contribution of tertiary sector is large, stock market movement & IIP may not always be correlated.
Stock market logic is propelled by the streams of monetary flow; under fractional reserve banking, it is , for example, important to think in JvNeumann's game theory behavior. The practical relationship between the 2 mentioned factors is low, because entrepreneurs, investors and speculators follow contra-polar aims. The flow of liquidity into productivity would be the best case in financial capitalism, but currently with high crisis risk, liquidity is pumped into assets like real estate and natural resources of land, i.e. economic cycles do matter.
Definitely there is a very close relationship between the two variables. In highly monetarised ecoconmy where many heavy industries and highly capitalised firms are quoted on the stock exchange, increased industrial production will impact positively on activities of the stock market. With increased industrial production there will be anticipated profits from such quoted companies, that will lead to the trading of their securities.
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