Impact of changes in the U.S. money supply on Canadian stock markets

Abstract

The purpose of this study was to determine whether a change in the U.S money supply (M2) growth affects the prices of the S&P/TSX composite index. This paper closely follows the two-stage approach of Sorensen (1982) to dichotomize a change in the U.S money supply (M2) into anticipated and unanticipated components. To conduct the analysis, the observations are collected from December 31, 1976 to June 29, 2012 (except the real GDP data that are from December 31, 1976 to December 31, 2011) and are averaged out to produce quarterly data. The results of this study indicate that the U.S money supply (M2) has a significant positive impact on the prices of the S&P/TSX composite index. Moreover, the results also indicate that there is a long-term relationship between the U.S money supply (M2) and the prices of the S&P/TSX composite index. Last but not least, this paper, on the one hand, supports the Efficient Market Hypothesis (EMH) on the fact that anticipated changes in the U.S money supply (M2) have no significant impact on the prices of the S&P/TSX composite index. On the other hand, the study refutes the EMH on the fact that unanticipated changes in the U.S money supply (M2) have also no significant impact on the prices of the index.