Co-movement in Stock Indices and GDP During the COVID-19 Period in the Countries of the European Union

Laszlo Torok
European Research Studies Journal, Volume XXIV, Issue 3, 01-19, 2021
DOI: 10.35808/ersj/2337


Purpose: Macroeconomic research rarely analyzes the short-run relationship between stock market indices and GDP. The study seeks to answer how close the two indicators are in the short term in times of crisis. Design/Methodology/Approach: The stock market crisis caused by the COVID-19 pandemic has also developed in the European Union member states. Following the low of the European stock market in March, there was a relatively rapid rebound. There was a decline in the third quarter and strong growth in the fourth. As a result of the fear caused by the epidemic, national economies were shut down to varying degrees by governments, leading to a decline in GDP as early as the first quarter. This decline continued in the second quarter, with a strong rebound in the third and a moderate rise in the fourth. The research methodology is correlation calculation and hierarchical cluster analysis. The research hypothesizes that in the short run, stock market indices moved along with GDP. The positive correlation between the two indicators can be assumed because investors' decisions were influenced by the decline in GDP due to COVID-19. The hypothesis was not met, only in four countries, the study confirmed the co-movement of indicators. Findings: The hypothesis of the research was not fulfilled, in the majority of the EU member states, the two indicators did not change together, they did not move in the same direction. The negative correlation coefficient for the Union as a whole (r = -0.16028) means that the indicators moved in the opposite direction. Of the 27 Member States, 23 were characterized by this opposite movement. Practical Implications: The study's empirical results draw the attention of investors, risk managers, and economic policymakers to the fact that short-term changes in GDP do not influence their decision-making. Short-term GDP data are fundamentally inadequate indicators. This means that these data cannot predict with significant accuracy either expected GDP, stock market performance, and many other macroeconomic indicators. Originality/value: The originality and value of the study are given by the fact that it examines a macroeconomic relationship that researchers rarely analyze. The study's empirical results can also be used by risk managers, investors, and economic policymakers.

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