Posted on 29th Dec 2024 12:03:01 AM Banking, Finance
Abstract
In this research paper, attempt has been made to explore the dynamic relationship between stock market and macroeconomic variables i.e. DSE index and three key macro economic variables (Exchange rate, Industrial production in and Reserve), by using unit root stationary tests and Johansan cointegration test. Monthly data has been used from June, 2003 to June, 2015 for all the variables, like, DSE index, Exchange rate, Industrial production in and Reserve. Results showed that the variables contained a unit root and were integrated of order one. The vector error correction model (VECM) (Johansen (1991)) is utilized to determine the impact of selected macroeconomic variables on stock market. Empirical results show that the stock market and macroeconomics variables have no long-term equilibrium relationship.
1.1 Introduction
The dynamic relationship between stock market returns and macroeconomic variables has been widely investigated, especially in developed markets. The early studies on the US stock markets by Lintner (1973), Bodie (1976), Jaffe and Mandelker (1977) and Fama and Schwert (1977) mainly examined whether the financial assets were hedges against inflation. These studies have reported a negative relation between stock returns and changes in the general price level. However, Fama (1981) found a direct positive relationship between stock market returns and real economic activities such as industrial production. Chen et. al. (1986), tested whether a set of macro-economic variables explained unexpected changes in stock market returns. It is recognized that stock markets play a pivotal role in growing industries and commerce of a country that eventually affect the economy. The importance of the stock markets has been well acknowledged in policy makers, portfolio managers, industries and investors perspectives. The stock market avail long-term capital to the listed firms by collecting funds from various potential investors, which allow them to expand in business and also offers investors alternative investment avenues to put their surplus funds in (Naik and Padhi, 2012). It is very interesting to invest in stock market but also a very risky trench of investment. So, potential investors always try to guess the movement of stock market prices to achieve maximum benefits and minimize the future risks. By concerning with the relationship between stock market returns and macroeconomic variables, investors might guess how stock market behaved if macroeconomic indicators such as exchange rate, industrial productions, interest rate, consumer price index and money supply fluctuate (Hussainey and Ngoc, 2009). Macroeconomic indicators such a compositions of data which frequently used by the policy makers and investors to gathering knowledge for current and upcoming investment priority (Masuduzzaman, 2012).
The issue whether the stock market performance leads or follows economic activity is now becoming very controversial in Bangladesh as the stock market has gained much attraction in the last few years. Almost all the indicators such as market capitalization, trading volume, turnover and the market index have shown tremendous growth, although it has volatility. In this end, how does and at what extent the stock market returns of Bangladesh respond to the changes in macroeconomic determinants remains an open empirical question. Understanding the main macroeconomic variables, which may impact the Bangladesh stock market index, with the recent data could be helpful for policy makers, investors and all other stakeholders. The present study therefore, attempts to explore whether there are long-run and short-run dynamic interactions between Bangladesh stock market index (DGEN-Key market-tracking index of Dhaka Stock Exchange -DSE) and key macroeconomic variables namely, Consumer Price Index (CPI), Exchange rate of BDT against USD (Exrate), Industrial Production (IP) and Reserve for Bangladesh, by using unit root, Engle-Granger, Johansen co-integration, error correction model (ECM). The section one of this study is the introductory part. The rest of the study is structured in five sections. The second section of the study will present an overview of related literatures that will give us a sound conception of the facts and section three gives an overview on development of Bangladesh stock markets. The section four provides an avenue regarding the research methodological approach and the relevant information on the time series data sets that are used for this study, while section five discussed the empirical results. Finally, section six will provide the conclusion that will point out the possible recommendations of the study as well.
1.2 Objectives of the study
In this study the major of the study are as follows-
1.3 Limitations of the Study
2.1 Literature Review
Bohn and Tesar (1996), Rapidly growing economies of emerging markets have attracted the accumulated funds of developed economies that are in search of diversification benefits or eagerly look for higher returns, as named ‘return chasers’.
Cheung and Ng (1998), observed evidence of long-run co-movements between five national stock market indices and measures of aggregate real activity including the real oil price, real consumption, real money, and real output by employing quarterly stock index and macroeconomic data of Canada, Germany, Italy, Japan, and the US. Long-term relationships between the stock market index and various macroeconomic indicators are commonly investigated.
Mookerjee and Naka (1995), on the other hand, show that short-run relationships among these variables exist in the Japanese stock market by employing a VECM in a system of seven equations.
Ajayi and Mougoue (1996), examine the relationship between stock prices and exchange rates by employing a bivariate error-correction model. They study both the short-run and long-run relationships between the two variables in eight major industrial markets.
Their results show that an increase in domestic stock prices has a negative short-run effect on the domestic currency value. However, sustained increases in the domestic stock prices in the long-run cause an increase in the domestic currency, due to the increased demand for the currency.
Muradoglu, Taskin and Bigan (2000), study the causal relationship between macroeconomic variables and stock returns in nineteen emerging markets, including Turkey.
They conduct Granger causality tests for each country on a set of selected macroeconomic indicators. They conclude that two-way interaction between stock return and macroeconomic variables derives from the size of the stock markets, and their integration with the world markets, through various measures of financial liberalization by using a multivariate approach.
Ibrahim (2003), obtained results suggesting cointegration between returns and the money supply in the Malaysian stock market.
Patra and Poshakwale (2006), examined the short-run dynamic adjustments and the long-run equilibrium relationships between selected macroeconomic variables, trading volume and stock returns in the Greek stock market during the period of 1990 to 1999.
Brahmasrene and Jiranyakul (2007), examined the relationship between stock market index and selected macroeconomic variables during the post-financial liberalization (pre-financial crisis) and post-financial crisis in Thailand. In the empirical analysis, they perform unit root, cointegration and Granger causality tests. Their results show that money supply has a positive impact on the stock market index, while the industrial production index, the exchange rate and oil prices have a negative impact in the post-financial liberalization period.
With respect to the post-financial crisis, money supply is reported to be the only variable positively affecting the stock market.
Kasman (2002), chooses GDP growth, industrial production, inflation and exchange rate as macroeconomic variables relevant to the characterization of the business cycle for the Turkish economy. Using daily returns, she estimates monthly standard deviations of stock returns as a measure of volatility. She reports that the plots of the volatility measures show an upward trend in employment rate, and thus, an enhanced economic stability.
Chen, Roll and Ross (1986), contribute to the fact that a long-term equilibrium relationship exists between stock prices and relevant macroeconomic variables. They find that asset prices react sensitively to economic news, especially to unanticipated news.
Hamao (1988), replicated the Chen, Roll and Ross (1986) study in the multi-factor APT framework. He shows that the Japanese stock returns are significantly influenced by the changes in expected inflation, and the unexpected changes in both the risk premium and the slope of the term structure of interest rates. The volatilities in real economic activity in Japan are weakly priced compared to the U.S.A.
Lee (1992), investigates the causal relationship and dynamic interaction among asset return, interest rates, real activity and inflation, using a multivariate VAR model with postwar U.S. data. He shows that prior stock returns Granger-causes real stock returns.
Darrat and Mukherjee (1987), use a Vector Autoregression (VAR) model along with Akaike’s final prediction-error on the Indian data over 1948-84, and show that a significant causal relationship exists between stock returns and certain macroeconomic variables.
Darrat (1990), tests the joint hypothesis that the stock market of Canada is efficient and the expected returns are constant over time using the multivariate Granger-causality technique. He finds that the Canadian stock prices fully reflect all available information on monetary policy moves.
Brown and Otsuki (1990), find that money supply, production index, crude oil price, exchange rate, call money rate and a residual market error are associated with risk premia and affect the Japanese stock market.
Mukherjee and Naka (1995), test the dynamic relationship between six macroeconomic variables and the Japanese stock market, by employing a vector error correction to a model of seven equations. They find that a long-term equilibrium relationship exists between the Japanese stock market and the six macroeconomic variables.
Granger (1986), provides the foundation of the validity of this fact by using a cointegration analysis.
Sadorsky (1999), finds that industrial production responds positively to the shocks in stock return and that oil prices play in affecting real stock return in more recent time.
On the other hand, other studies left this matter as an open question as to whether there exists a significant reliable statistical relationship. (Homa and Jaffee, 1971; Fama, 1981;and Gultekin, 1983).
References
Table of Contents
Chapter 1: Introduction
1.1 Introduction
1.2 Objectives of the Study
1.3 Limitations of the Study
1.4 Chapter Layout
Chapter 2: Literature Review and Theoretical Framework
2.1 Literature Review
2.2 Theoretical Framework
Chapter 3: Data and Methodology
3.1 Data and Data sources
3.1.1 Data
3.1.2 Panel Data
3.1.3 Data Sources
3.2 Methodology
3.2.1 The unit root test
3.2.2 Johanson cointegration test
Chapter 4: Analysis and Discussion
4.1 The unit root test
4.2 Cointegration test
Chapter 5: Findings, Recommendations and Conclusion
5.1 Major Study Findings
5.2 Recommendations
5.3 Conclusion
Research, Paper, Dynamic, Relationship, Stock, Market, Macroeconomic, Variables, Theoretical, Framework, Johanson, Cointegration, Test, VECM, CPI, ECM, GDP
Share on Facebook