Estimate an error-correction model

Reference no: EM132268305

For Finance Group

1. An empirical investigation into the relationship between stock market prices and macroeconomic fundamentals: Tests Based on Cointegration Analysis.

s_t = β₀ + β₁I_t + β₂P_t + β₃m_t + β₄r_t + u_t

where st is the logarithm of the stock market price, It is the logarithm of industrial production, mt is the money supply (Nil or M2) and rt is the
nominal interest rate and ut is the error term.

You can also include the government expenditure and the real exchange rate as additional variables to examine whether they affect the stock market prices. If you find cointegration between the stock market price and macroeconomic fundamentals (industrial production, consumer price index, money supply and nominal interest rate), you can then estimate an error-correction model normalizing on changes in stock market prices.

Test the above model for Saudi Arabia, using monthly data on the variables underlying the model over the period 1995M1-2018M12.

Extract special data for Saudi companies in Saudi riyal for 10 years for Industrial production.

Reference no: EM132268305

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