The Relationship between Money Supply and Stock Prices Finance Essay

In this paper Rudolph studied on short-term relationship between money supply and stock prices that shows the correlations between changes in the money supply and changes in the stock prices, which was the subject of this body, that first became deceptive for Rudolph in 1967. It was in short-term nature, It believed these correlations signify a new finding in the ongoing investigation into the relationship between money and level of stock prices. For this Rudolph take the data of money supply (M) was used in the charts that comprises of time and demand deposits of all commercial banks in the country + currency in the hands) which becomes seasonally adjusted M2.and stock price data was gathered from slandered and Poor (S&P). Both money supply and stock prices were gathered weekly basis. It follows from his findings that long-term rates of change tend to show stock prices synchronized with or even projecting money supply changes, however, indeed, money supplu leads stock prices. According to Rudolph Changes in the rate of change of Money supply M were followed about seven weeks later by equivalent changes in stock prices SP. This knowledge is was helpful for to the longer-term investor as well as helpful for the trader, for to properly delay a purchase for a few weeks, for in-stance, can often mean a substantial difference in the return on the investment. The investment results described above are based on a single time period ('67 to '71), and disregard trading costs (which would be substantial, given the indicated number of purchases and sales). In conclusion Rudolph were found the correlation between money-supply changes and stock-price changes evident in his charts. On the other hand, he believed that these charts, which were presented in his reports that were merely a incomplete selection, deliver powerful new support for the relationship between money supply and stock prices a relationship no serious investor can afford to ignore.

(Hamburger and Levis, 1972) The purpose of this paper was to addition to the understanding of relationship between money supply and stock prices and also the channel of influence of money supply on stock prices. In precise the analysis was interconnected to a number of limitations contained in earlier studies. For this few activities had been made by researcher (i) to estimate the effects of risk on the common level of stock prices & (ii) to determine the effect, if any, that distinctions in the growth rate of money have on these dynamics the hypothesis was that money has no direct influence on the stock market and for this data was used quarterly . The first of these effects the most acquainted was the "liquidity effect" of changes in the amount of money upon interest rates. The money stock is itself an asset in the portfolio of capital owners. Increases in the money supply will cause decreases in the profits to holders from the last dollar of money held. Changes in the money supply were, therefore, a alternative for changes in the stock return of capital owners. The second main channel by which money touches stock prices was by changing the actual demand for goods and services. Third important component by which money effects the stock prices was risk premium .An asset has a risk premium to the extent that it contributes to the variation in the value of the holder's total portfolio. In conclusion it was doubtful that the indication will provide final answers to the questions of how money affects the stock market or how the possessions of money should be measured. There are the widely known influences rolling through long-term bond rates and corporate earnings.

(Michael Palmer 1970) This study discovered the relationship of engagements in the nation's money supply to variations in common stock prices. this theory credits changes in the stock of money as the main causal factor creating fast changes in total monetary demand and ultimate changes in total output and/or price levels. The model emphases on major changes in the money supply and common stocks prices 10years data was gathered for this research on weekly basis. This investigation was recommending that changes in the growth rates of the private sector's stock of money may changes that sector's wishes to substitute money stabilities for other financial assets. from this relationship, two main situations can be explored: (i ) An increase in the growth rate of the money stock may create extra liquidity. This imbalance will motivate the private sector to substitute extra money balances for less liquid financial assets like as corporate stocks. This change can lead to increased buying pressures on these less liquid financial assets. (2) A decrease in the growth rate of the money stock may create a shortfall liquidity situation. This imbalance may motivate a shift from less liquid financial assets into money. This conclusion of the private sector's effort to achieve liquidity balance can generate selling pressures on these less liquid financial assets which may produce overall price decrease. Conclusion liquidity disequilibrium may ultimately changes less liquid financial assets through a sifting process with investors initially changing new money balances into financial assets similar (in terms of liquidity) to those released. the closer the degree of liquidity of the initial asset purchased by the Federal Reserve to corporate stocks, the lesser the time period between a change in the growth rate of the money supply and changes in stock prices.

(ROGALSKI & VINSO 1977) It state the purpose of this paper was to re-examine the relationship between money supply and stock prices to determine whether dependence can be recognized and in which direction the causality is demonstrated. It was generally prescribed that an unpredicted increase or decrease in the growth rate of money results in a change in the balance position of money with respect to additional assets in the portfolio of investors. As a outcome, investors try to change the proportion of their asset portfolios characterized by money balances. While investors can correct, the system cannot since all money balances must be held. As a outcome, stability was recreated by changes in the price levels of the various asset types. Value of financial assets is an important element in asset portfolio of investor, including common stocks. It can be anticipated that changes in portfolios caused by changes in the monetary element will arise in this account as well as those accounts signifying real goods and services. Since it also can be anticipated that the time response of investors may be delayed, Researcher hypothesis was changes in the money supply cause changes in stock prices. If the hypothesis is true, then changes in stock prices should respond to monetary disturbances with a lag. . The conclusion was changes in money supply causes the stock return but stock return can not predict future money supply

(PEARCE & ROLEY, 1983) This paper investigates whether the response of common stock prices to weekly money announcements is consistent with the efflcient markets hypothesis. In this research the focus was on the very short-run response of stock prices to both anticipated and unanticipated announced changes in money. For this the weekly data were used in this paper start from 29 September 1977, and end on 29 January 1982. the hypothesis was for this research was that anticipated money affects stock prices The implication of this work was that investors could earn above normal profits by using a exchange strategy based on the observed behavior of the money stock. This contradicts the efficient markets hypothesis which asserts that current asset prices reflect all available information so that no such trading strategy can exist. This paper was studied the short-run response of stock prices to weekly money supply publications. Several results emerge from this experimental investigation. (i) stock prices react only to the unanticipated variation in the money supply as predicted by the efficient markets hypothesis. (II), an unanticipated increase in the announced money supply reduces stock prices while an unanticipated decrease raises stock prices. (III), the stock price reaction did not depend on the relationship of the money supply to the long-run series of the Federal Reserve, & there was limited proof that the stock price react changed as a result of the Federal Reserve's change to a reserve-aggregate approach to monetary control.

(BENNETT and SIAS, 2001) . In this analysis it illustrate that money flows was highly correlated with stock returns of same period. It also establish strong proof of "money flow motion," in that a times series data with lagged can be helpful to predict future flow of moneys. Most important thing in this was finding was that flow of money appeared to predict cross-sectional deviation in future returns. money flow was defined as the change between upward and downward position of dollar trading volume, and was used as a technical indicator since the timely 1970s. The sample was taken from NYSE- listed companies for 1-year and calculated daily money flows and excluded the companies which was traded less than 25 times in a day.in conclusion money flow as an fascinating technical indicator that show the Positive change indicate surplus demand, while negative changes indicate surplus supply. If persistence happens in surplus demand and supply, then money flow can be able to forecast future return and also it concluded strong positive correlation between flow of money and return measured for the concurrent period.

(HOMA and. JAFFEE, 1971) The objective of this paper was to develop and evaluate a relationship between the money supply and common stock prices, and then estimate the effectiveness of this relationship as a predicting tool in the use of investment strategies. The importance of the money supply as a element of stock prices and resulting of both from the structural relation of the stock market with monetary environments and from the part that the supply of money plays as a common indicator of economic anticipation. Return was calculated from dividend growth model and price of any share was described in three variables growth rate of dividend, risk free interest rate and risk premium. And study the relationship between the money supply and the stock market was calculated by using regression analysis technique. The conclusion of this paper was divided into two parts first part shows the evidence that shows a significant and systematic relationship between money supply and stock return. In second part it shows the estimation of these results called the market test from which information generated by the stock market relationship that was helpful for an investor. The estimation clearly depends on the investor's ability to forecast the money supply.

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