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INFLUENCES OF MONEY SUPPLY AND OIL PRICE ON U.S. STOCK MARKET

Matiur Rahman

McNeese State University, USA

Muhammad Mustafa

South Carolina State University, USA

 

ABSTRACT

This paper studies the long-run and short-run dynamic effects of broad money supply (M2) and oil price on U.S. stock market (S&P500). Monthly data are employed from January, 1974 through April, 2006. Each variable is nonstationary in level with I(1) behavior. The above three variables depict a cointegrating relationship. The vector error-correction models do not reveal any converging long-run causal flows, although short-run interactive feedback relationships exist. The current volatility of U.S. stock market is fueled by its past volatilities. Negative monetary and oil shocks initially depress the U.S. stock market.

Keywords: Cointegration, Oil Price, Money Supply, Stock Market

JEL Classification: C32, E32