DOES THE STOCK MARKET ACT AS A SIGNAL FOR REAL ACTIVITY? EVIDENCE FROM AUSTRALIA

Binswanger (2000) concluded that traditional links between stock market performance and two major macroeconomic indicators, production and GDP, broke down in the most recent US bull market. Australia's stock market also took off in the early 1980s and the objective of the present paper is to contribute to the literature on the connection between the stock market and real economic activity, using Australian data. The study finds that, unlike the US, the links between stock prices and industrial production or GDP remained strong during the high-growth phase in Australia. However, this relationship breaks down in periods of slower economic growth with contradictory empirical results for different macroeconomic indicators. The paper concludes that increasing globalisation is the most plausible explanation for this phenomenon.