Economic Growth and Equity Returns Revisited—New Evidence in the Time and Frequency Domain

ABSTRACT This paper takes a fresh look at the relationship between economic growth and stock returns in a sample of 10 OECD countries. The correlation coefficients show substantial variation over time, generally increasing in times of turmoil. To get a clearer picture of the economic growth–equity returns nexus, we take into account both the time and the frequency domain using Granger causality tests and cross wavelet analysis. The results point to stock market returns Granger‐causing changes in GDP per capita in the time as well as in the frequency domain. In line with this finding, the cross‐wavelet coherency plots indicate areas of joint periodicity at high and medium frequencies, especially following the great financial crisis and economic meltdown at the end of the first decade of the new millennium. The analysis of volatility transmission shows that these results are driven by volatility spillovers from the stock market to the real economy.