6/13/11

Angry Bear on the relation between S&P 500 and GDP

A month ago Mike Kimel had a post on Angry Bear dealing with the relationship between the S&P 500 market index and nominal GDP. His naive regression showed correlation of ~94%. One should not forget that Clive Granger introduced the idea of spurious regression 30 years ago. (A surrogate Nobel Prize for this finding in 2003.) This correlation is a good example; both variables are nonstationary, I(1), and are not cointegrated. Hence, the above correlation is spurious.

Actually, the S&P 500 returns are coitegrated with the change rate of real GDP per capita and this correlation is not spurious as shown in this blog and our paper on S&P 500.
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