Do macroeconomic fundamentals matter for stock returns in Australia and New Zealand?

Abstract

In modern financial theory, macroeconomic fundamentals play an important part in the value of stock prices. This paper investigates the relationship between macroeconomic fundamentals and stock prices in the Australasian context, analysing both the Australian and New Zealand stock markets. The data set contains monthly observations from 1995 to 2017 and as such, the macroeconomic conditions of the Global Financial Crisis are taken into account in our analysis. Vector Auto Regressions (VAR) were used to examine the sensitivities of the macroeconomic variables to the stock price indices. From the analysis, it was found that both New Zealand and Australia have fundamental economic variables that explain stock returns. However, none of the lags of the variables were found to be statistically significant in any of the models. This conforms to financial theory. Efficient markets adjust to information quickly and the intrinsic value of shares on the two exchanges are affected by current and future expected macroeconomic factors. While the length of the study provides many different stock market conditions, extreme market conditions such as the Global Financial Crisis (GFC) limit the power of the regressions.