The purpose of this paper is to determine whether macroeconomic variables, in particular, money supply and budget deficit, are important in predicting stock prices in Taiwan, Hong Kong, Singapore and South Korea. Quarterly data on stock price indices, money supply and budget deficits are employed in this study. Our results are broadly consistent with the general economic literature on macroeconomics and suggest that there exists a long-run equilibrium relationship between macroeconomic policies and stock prices for the four countries studied; stock prices do not necessarily adjust quickly and fully to changes in either monetary or fiscal policies, in the short run. This paper also represents an important step toward addressing the issue of spillover identification between the macroeconomic environment and the stock market.
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