International Journal of Business and Social Science

ISSN 2219-1933 (Print), 2219-6021 (Online) DOI: 10.30845/ijbss

Testing the Effect of Capital Flow on Stock Market Return: Empirical Evidence from A Study of United States of America
LAI, Ping-fu (Brian); NGOK Chun-kit (Patrick)

This research is to analyze the effect of capital flow’s path on the return of the stock market in the United States. First, eight variables are tested using Pearson Correlations to explore the relationships between stock market return and Standard Multiple Regression is conducted to investigate the prediction ability. Second, Pearson Correlations are repeated to find out whether the eight variables and stock market return have lead-lag relationships and run a regression again. Third, the data set is divided into two panels representing different investment environments. Panel A is when the growth rate of M1 greater than the growth rate of M2 while Panel B is when the growth rate of M2 greater than the growth rate of M1. The findings of this research show that six out of eight variables have lead-lag relationships with the stock market return. When dividing into two panels, most of the eight variables have a more slightly correlated relation with the stock market return and the prediction ability of the variables is stronger than the original data set.

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