Ž . Journal of Empirical Finance 5 1998 281–296 International evidence on the stock market and aggregate economic activity Yin-Wong Cheung a, ) , Lilian K. Ng b a Economics Board, UniÕersity of California, Santa Cruz, CA 95064, USA b Hongkong UniÕersity of Science & Technology and UniÕersity of Southern California, Los Angeles, USA Accepted 29 July 1997 Abstract Using the Johansen cointegration technique, we find empirical evidence of long run comovements between five national stock market indexes and measures of aggregate real activity including the real oil price, real consumption, real money, and real output. Real returns on these indexes are typically related to transitory deviations from the long run relationship and to changes in the macroeconomic variables. Further, the constraints implied by the cointegration results yield some incremental information on stock return variation that is not already contained in dividend yields, interest rate spreads, and future GNP growth rates. q 1998 Elsevier Science B.V. All rights reserved. 1. Introduction It is often observed that stock prices tend to fluctuate with economic news, and this observation is supported by empirical evidence showing that macroeconomic Ž . variables have explanatory power for stock returns. Fama 1981, 1990 , Chen et al. Ž . Ž . Ž . Ž . 1986 , Barro 1990 , Schwert 1990 and Ferson and Harvey 1991 have found that U.S. stock returns and its aggregate real activity are correlated. Asprem Ž . Ž . Ž . Ž . 1989 , Beckers et al. 1992 , Ferson and Harvey 1993 , Cheung et al. 1997a,b have reached a similar conclusion using other international market data. ) Corresponding author. Tel.: q1-408-4594247. 0927-5398r98r$19.00 q 1998 Elsevier Science B.V. All rights reserved. Ž . PII S0927-5398 97 00025-X